China Overtakes India in Gold Demand

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"Expect to see a strong correlation between overall growth in the Chinese economy and gold prices. . ."

Driven by aggressive industrial policy and backed by the hard-working hands of over 1.3 billion citizens, China's economic doctrine can be summed up in one word: volume.

And they consume with the same voracity as they produce.

So when the Chinese take a national interest in gold, investors should pay close attention.

China Gold Demand

On the strength of their expanding economy (which grew a better-than-expected 7.9% in the second quarter of this year), China's national demand for gold increased 11.4% to 89.6 tons, compared to the same period of last year; equivalent to a 14.7% increase in dollar terms, or $2.66 billion.

Meanwhile, demand for gold across the rest of the world (excluding China) declined 18.0% to 480.1 tons during the same period, equivalent to a 15.6% decrease in dollar terms.

In fact, demand figures from the first half of this year suggest that China has overtaken India as the world's largest gold consumer.

During the first two quarters of 2009, consumer demand for gold in China totaled 194.8 tons, equivalent to 18.7% of world total demand. In the same period, Indian demand for gold totaled 126.7 tons, equivalent to 12.1% of the world's total demand.

While it may be a bit premature to expect Chinese gold demand to outpace Indian demand for the entire year, the gap between the two countries is narrowing. And one could easily see China overtake India in gold demand on a sustained basis within the next 10 years, perhaps even within the next five years.

Although this trend may have little overall impact on gold prices in the near future—due mainly to China's own domestic gold production satisfying most of its internal demand—there may be implications in the not-too-distant future.

It is only a matter of time before Chinese gold production simply cannot keep up with the country's own demand, despite accelerated output. This imbalance, coupled with speculation, should have a magnified effect on the gold market across both hemispheres.

Expect to see a strong correlation between overall growth in the Chinese economy and gold prices in the years to come.

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