Gold—The Real Shape of Chinese Gold Demand
Source: Julian D. W. Phillips, Gold Forecaster (4/1/10)
The respected World Gold Council has issued a report on the Chinese gold market. . .
The respected World Gold Council has issued a report on the Chinese gold market. In it, WGC points out that, local Chinese consumers are well aware of gold's benefit as a store of value and that jewelry has always been regarded by Chinese buyers as an investment. Like Eastern demand in general, the Chinese want gold, not diluted gold, so at least 80% of total gold jewelry demand in China is accounted for by 24-carat gold.
Chinese jewelry demand has averaged 250 tons of gold per annum over the past 10 years. Total jewelry + bar hoarding demand has averaged 3,355 tons over the same period, giving China an average market share of just over 7% of total. Last year, jewelry demand grew, in contrast to the rest of the world, by 6% year-on-year to reach 347 tons, which was equivalent to 21% of world jewelry demand.
This works out at 0.26 grams per capita, substantially lower than other areas with a similar affinity to the metal, such as the UAE, Saudi, India, and other parts of the East Asian continent. This is accounted for not only by the still very low level of income earned by the average Chinese citizen, but by the immature nature of the Chinese gold market.
Urban Development and the Rise in Disposable Income
The gold market has to follow wealth development, which starts in the towns and cities. While the economy is growing rapidly it is only at a 'young' stage, with vast increases still to come. Within 10 years we believe 2/3rd of the Chinese population will live in towns and cities leaving 1/3rd still in the countryside feeding the urban population. But of greater importance will be the speed with which disposable income will rise. China's appetite for gold will rise alongside the rise in disposable income, as will the level of gold off-take. This is augmented by the high savings ratio of the Chinese, together with a lack of alternative investment vehicles. This is an explosive formula for gold demand.
Just think of it, when a company is just below break-even point a rise in profitability through that level, to moderate profits is the most dramatic event a company can experience. Thereafter, similar rises in profitability mean a steadily lowering of percentage increases in profitability. So it is with an individual.
The first thousand dollars above one's needs is a heady amount, the second not so dramatic. Now apply that principle to China and its 1.4 billion people. The pace of growth in the gold market is set to explode in the years to come and, with all due respect to the WGC, should explode far more than a doubling in 10 years. Just look at the growth of its car market. We expect the same in its gold market.
Net retail investment in gold in China in 2009 was 81 tons, up 22% year-on-year. China thus accounted for 43% of the world total in that category last year. Coins and bar hoarding have been growing strongly in recent years and we believe will jump almost on an exponential rate in the years to come.
Like Indian gold owners, gold represents financial security, so we agree with the WGC when they say that Chinese investors are much less likely to sell into strength than some of their counterparts elsewhere in the world.
On an institutional level gold is finding favor as well. The China Investment Corporation is moving into commodities and real estate and recent filings with the SEC show that the CIC took a 1.45 million share stake in the SPDR Gold Shares Fund in New York (equivalent to 4.5 tons) in the fourth quarter of last year.
On the immediate front, a trend over the last few weeks has been that the gold price rises in Asia time and is pulled down in London and early New York time.
We expect remarkable growth in demand from China in the years to come, which by itself, will support present prices and take them far higher in times to come.
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