China: The Main Driver of Gold Demand

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We wrote over a year ago about China actively urging its citizens to buy gold and silver and of course we hear constantly about how China’s insatiable demand for base metals and ores is driving up the price of all metals, but an intriguing article on a Wall Street Journal blog by Carolyn Cui explains how the two have been playing out quietly behind the scenes. Not that China’s demand for gold is some kind of secret. We have written in MetalMiner about increased state reserves of gold, partly from increased mining activity and partly from purification of lower purity reserves held but not previously recognized as part of China’s reserve. But what is curious is how widespread in demand and how substantial in character the phenomenon has been.

As the government has loosened restrictions on ownership of gold, the metal has been purchased both by financial institutions and individuals. In August, import and export of gold by banks was relaxed, opening up the market. In the first 10 months of this year, China imported 209.7 metric tons of gold, a fivefold increase with the same period last year. As Ms. Cui notes, trading volume increased 43 percent to 5,014.5 tons on the Shanghai Gold Exchange in the first 10 months of 2010. At a speech at the China Gold and Precious Metals Summit in Shanghai, Mr. Shen, chairman of the exchange, detailed the size of China’s imports this year — purchases were big enough to absorb all the gold that the International Monetary Fund had shed during that time period, which stood at 148.6 tons. The gold market often looks to the major ETFs as drivers of gold demand, but China’s purchases also exceeded the SPDR Gold Shares, the world’s largest gold-backed ETF, which added 159.48 tons of gold into its holdings in the same period. China’s Ministry of Industry and Information Technology said the nation’s gold production reached 277.017 metric tons in the January-to-October period, up 8.8 percent from the same period last year.

China’s 2010 gold production is expected at about 350 metric tons this year and according to the World Gold Council, could double in ten years. More than fears of inflation, sovereign debt crises, the squabbling Koreas, or a weakening US dollar may be the driver of the gold price being good old-fashioned demand from the world’s biggest buyer. Now wouldn’t that be a novelty?

–Stuart Burns

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