by Commodity Online
China is on a gold drive and it has overtaken India as the world’s largest purchaser of gold at 90.9 million tons in gold bars and coins for Q1, 2011. This is up 123% from 40.7 tons last year for the same period. India meanwhile has purchased only 85.6 tons of gold this year.
There are seven factors that drive Chinese gold demand, according to the recent World Gold Council Report:
Culture: China has a golden culture and gold buying and gifting is an integral part of the same. When a child is born, it is customary on the part of Chinese people to gift the newborn with gold. On birthdays, people gift gold and New Year and weddings are opportunities to splurge on gold. Gold in China is considered to bring good luck and is touted as the colour of emperors.
Hedging: Y-O-Y increase of 11% in Q1 global gold consumption is attributed to investment demand, and gold being a preserver and enhancer of wealth is used as a hedge against inflationary wealth loss. The same is the case with China. Chinese view gold as an investment and a hedge against inflation.
Global uncertainty: Gold forms only 1.6% of China’s total wealth reserves. There is a possibility that People’s Bank of China (PBOC) would buy more gold, given the uncertainties prevailing in the planet. This includes the MENA (Middle East North Africa) unrest.
Investment diversification: With liquidity flowing into China, people fear that certain asset bubbles have formed especially in the real estate sector. The Chinese government is sparing no efforts in taming the scenario and maintaining normalcy. In this regard, a number of measures have been initiated by the government to curb excessive rise in property price. This has made other asset classes to have better investment appeal. Gold is one among them.
Advisory: With the dollar losing its sheen subsequent to the QE schemes, Chinese economists like Li Yining are calling for increased gold purchases and improvement in gold reserve figures. This is another factor driving up gold demand in China.
Institutional investment: Chinese institutional investors like China Investment Corporation (CIC) are allocating more money into gold. Capital preservation and not speculation drives the institutions, records World Gold Council.
Prosperity: The World Gold Council also says that with the reforms taking root in China, and economy getting accelerated, the disposable income with Chinese middle class is also going up. In a decade, the country may witness double the gold demand. 75 million households in China with an annual income of more than $4300 per annum would be here by 2015. The figure was 15 million in 2005. Household savings would also triple in the period between 2005 and 2015, statistics say.
Meanwhile the same report indicates demand destruction in gold jewellery in US. US purchased only 20.5 tons of gold which is a Y-O-Y drop of 10%. The high prices have reportedly kept Americans at bay.
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