Latest reports out of China put consumer gold demand in the first 2 months of the current year at a phenomenal 200 tonnes - and buying momentum is still continuing.
Author: Lawrence Williams
In amongst all the comment and analysis regarding the effects of the various Middle Eastern and North African power struggles on the gold price, the latest news on Chinese domestic gold demand has almost passed by unnoticed. According to Peer Hickson, the global commodities strategist for gold-focused Swiss Bank, UBS, in a report by Bloomberg, Chinese gold demand hit no less than 200 tonnes in the first two months of the current year. If that is extrapolated over a fill year - and the gold purchasing momentum caused by inflation-nervous purchasers suggests that there is even a possibility that demand could rise - this would mean that the Chinese consumer could be in line to buy close on 50% of global mined gold (and this does not include what the country's Central Bank may be salting away as well.)
The 200 tonnes in two months figure is MASSIVE. We recall that only a couple of months ago we were reporting that Chinese gold imports in the first 10 months of 2010 totalled 209 tonnes, itself a 500% increase on the previous year. It now seems that demand by individuals is reaching almost frightening levels. Not only is jewellery demand seen as being up by 70% year on year, but investment demand (coins and bars as opposed to jewellery, which has been the main outlet for gold purchases in the past) is also coming on strongly from virtually nothing a couple of years ago to a WGC estimate of close on 180 tonnes in 2010. If the pace of growth continues investment demand alone could reach as much as 300 tonnes in 2011!
If the Chinese Central Bank is absorbing domestic production, as many believe then total Chinese demand this year could soar past India's. The potential is almost beyond belief. Indeed Chinese offtake is more than matching any disposals from gold ETFs, and with the continuing justified worries about inflation in China the momentum is likely to continue regardless of the gold price elsewhere.
This area of demand is something which has only really come to life in the past two years, and it seems that many observers and analysts are just not feeding this information into their predictions. As we've noted here beforehand this kind of demand level - particularly as it is not from a population which trades in and out on price, but holds its bullion and jewellery as insurance against really hard times - does tend to limit downside risk in the gold market.
But what of the Chinese Central Bank? There is evidence that China is positioning itself to make the yuan at least a part of any new reserve currency package which might replace the still-declining U.S. dollar in global trade. There is the strong suggestion that it needs to build its gold reserves as backing for this at least to levels approaching those of the biggest European Central Banks, which suggests a doubling of Chinese gold reserves at the very least in a relatively short space of time. We know that China has been buying on gold price dips as various officials have confirmed this in the past, although we have no idea of the volumes involved. Maybe the country will announce another revaluation of its reserves in the near future, even though it tends to be cagey about such announcements as it knows any significant increase will affect the global gold price and while it may be soaking up excess gold it still wants to buy it at what it may see as bargain prices!
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