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Chinese Demand Drives Gold Prices

Written By Brian Hicks

Posted November 11, 2013

India is the largest gold importer in the world. From 2012 to 2013, the nation imported 845 tons of the metal, and in October, it increased its gold and silver imports by 62.5% to $1.3 billion.

China is the second largest gold importer, but it may end up surpassing India to become number one. It’s expected that China may consume 1,000 tons of gold this year, particularly considering it imported as much as 826 tons from Hong Kong in just the first nine months of the year – twice as much as the same period last year.

GOLD OUTLOOKWhile Indians use gold primarily for jewelry, the Chinese also use it as an investment in economic hardship. And this past weekend, China’s Communist Party met to discuss an economic reform bigger than anyone has seen in 35 years. People are worried about the changes, and gold may end up benefiting from it.

Over the last year, gold has taken some hits as the U.S. economy sat on the edge of a cliff for months. On Friday, gold rose to $1,309, but that was after taking a hit on Thursday as a result of a better-than-expected GDP report from the United States. Even with the rise, gold is still down 21 percent for the year and is 31 percent lower than its high in September 2011, as CNBC reports

But the changing economy in China may be what drives the price of gold back up.

Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management, told CNBC:

“Meaningful reform will be painful and disruptive, and I suspect a lot of Chinese will seek the perceived safety and portability of gold.”

Property Prices and Gold Demand

One of the issues in the Third Plenum of the Communist Party is China’s property market. Before now, the Chinese bought property much like they did gold: as an investment. But China’s property market is also in a bubble, and as prices rise out of control, there is growing fear that bubble will burst.

The Third Plenum may decide to increase property taxes to deter the growth of this housing bubble and discourage over-investment in property. And this could push many of these investors toward gold instead.

Miranda Carr, head of China Research at North Square Blue Oak, said to CNBC:

“The expansion of the property tax may make people less willing to invest in property and gold would be an obvious alternative.”

But property tax isn’t the only thing pushing the Chinese away from real estate; rising housing prices are too. Some Beijing homes are more expensive than ones in Britain and Japan, as Reuters points out, and prices nationwide are rising faster than they have in three years.

Buying houses is becoming a problem as prices grow, and sellers are having trouble too. The rising prices are making it hard to earn a good return on real estate investments.

For example, according to an International Monetary Fund report, a 70-square-meter house in Beijing cost 20 times more than the annual disposable income of a Chinese household in 2011. Prices have risen since then, and will continue to do so well into the future.

Rising Gold Demand

Demand in China is now outpacing production, which is why the nation is importing gold from Hong Kong. If this continues, gold prices will see a significant increase – and this is highly likely.

According to the International Business Times, one of the reasons production is failing to keep up is the state of the gold mine licensing system. As of right now, there are few rules surrounding the industry, allowing private investors to sell the rights to producers for inflated prices. This has become so common that much as 70% of gold tenements are owned by private investors.

Production costs are rising too, and this is also affecting supply. Last year, production cost $907 per ounce, but in 2013 this has gone up to $912 per ounce, according to China Gold International Resources.

With China making its way up to being the largest importer of gold, it’s likely the price of the metal will rise in the near future. And since prices are so low right now, it’s a good time to get into gold. You can buy at a good rate now, and this will allow you to profit when China’s demand pushes prices back up.


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