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China's Gold Intentions
By Alena Mikhan
In broad strokes, today's investment world seems to be divided into two large groups - gold optimists who expect the metal price to keep ascending, and skeptics concerned about a near end to the gold bull market. In this brief overview we present another reason why the former group may be closer to the truth - Chinese demand.
Look at the top gold-holding countries in the table below:
Rank
Country
Tonnes
Percent of total reserves
1
US
8,133.5
73.8%
2
Germany
3,401.0
69.8%
3
IMF
2,814.0
n/a
4
Italy
2,451.8
68.0%
5
France
2,435.4
64.8%
6
China
1.054.1
1.6%
7
Switzerland
1.040.1
17.4%
Source: World Gold Council's World Official Gold Holdings, March 2011
China's gold holdings aren't the largest by volume, but they stand out when compared to its percent of total reserves - they amount to only 1.6% (around $55 billion at current prices) of the country's total reserve assets of $3 trillion.
There seems to be a lot of room to grow. Recently, opinions of Chinese economists and advisers startedemerging, suggesting that the country's central bank should increase its gold reserves as a hedge against the falling values of other currencies. In the annual report by the People's Bank of China, their own analysts expressed an interest in expanding the country's gold reserves. In brief, there seems to be a growing weight of opinion among Chinese decision-makers to add to the country's official gold holdings. This process is already taking place - but as an unstated current in the gold market, so as not to impact prices significantly. There is a precedent for this, if you recall: In April 2009, Chinese officials announced increased reserves, but the purchases had been done in the preceding years in what we would characterize as "stealth mode."
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Official demand is only part of the story. What we believe will change the picture is the fact that China's appetite for gold has been increasing by 14% a year on average since the market deregulation that took place in 2001. If this average pace is preserved, China will be consuming more than 1,000 tonnes yearly by 2015. Have a look at the trends for gold in China:
(Click on image to enlarge)
There are plans to further liberalize the gold market, according to the In Gold We Trust report: "[W]ith numerous banks granted access to the Shanghai Gold Exchange[, t]his could facilitate the purchase of gold for millions of Chinese bank customers." (p. 51) Taking into consideration the Chinese savings ratio of 35%, a growing middle class with more disposable income, high inflation, and an overheated property market, there seems little doubt that the flow into gold will continue, and may well increase.
The interest in gold savings deposits for example is enormous. Industrial and Commercial Bank of China introduced this form of savings product in December 2010, and since then 1.5 million accounts have already been opened. Last year the World Gold Council expected the Chinese gold demand to double by 2020. Now the organisation believes that it could double sooner than that. (In Gold We Trust, p.59)
2011 may well be the first time that China surpasses India as the world's largest gold consumer. This has clear and huge implications for investors; and that's why we continue focusing on gold as a central feature of our investment strategy.