Chinese Gold Demand

Brian Hicks

Updated May 8, 2013

Chinese gold demand has recently seen quite an increase, as evidenced by first quarter consumption. Net gold flows from Hong Kong to mainland China saw an increase from 97.106 tons in March to 223.519 tons in February, reported the Hong Kong Census and Statistics Department.

China is currently the world’s second largest gold consumer, right behind India. In fact, the World Gold Council has stated that these two countries combine for more than 33 percent of the global demand.

GOLD OUTLOOKThe interesting thing to note about this surge in gold demand is that it appears to be satisfied primarily by the average Chinese consumer. When gold prices fell over 13 percent on April 14th and 15th, a wave of Chinese mothers began a frenzied buying spree of gold jewelry, coins, and bars, as the Global Times reports.

In China, gold is commonly gifted to new mothers and babies. Some reports indicate that these Chinese housewives may have spent as much as $16 billion over the past two weeks on these purchases.

As gold prices underwent their recent slump, statistics show that gold usage (demand) within China increased 26 percent during the first quarter. It is also interesting to note that the data for these imports was taken during the time period before gold prices seem to have bottomed.

Indeed, there are even reports that after this recent buying surge, many jewelry stores across the country are sold out. This may indicate that the imports and demand for gold in the April numbers will show additional increases.

Future Gold Outlook

Analysts and gold experts seem split as to how this increase in Chinese gold demand has already, and may continue, to affect gold prices going forward. Consumer demand is certainly a strong source, but many experts consider this to be fickle and not nearly as influential as central bank buying and selling.

The only sure answer as to why gold prices fell so rapidly in the middle of April is the presence of more sellers than buyers.

There is also speculation that large Wall Street traders and investment houses have begun to sour on gold as the economic prospects in the U.S. seem to be on the mend. This would normally lead to traders taking short positions in the metal, hoping to cash in as the price declines.

As the speed of that decline increases, as happened on the 14th and 15th of April, many traders will be inclined to take even more aggressive short positions, increasing the momentum of the downward slide.

Of course, these shorts do eventually need to be covered, which may have occurred as the prices leveled and then began to rise.

A number of gold analysts also see that a central banks, including those in India and China, are increasingly looking to augment their stores of gold. If this trend continues, then this will undoubtedly influence rising gold prices once again.

Chinese physical gold production is also currently about half of national demand, so it is also natural that other gold imports will continue rising.

Yet everywhere in the world you look, the gold miners are not able to catch up with the increased demand and even higher prices. There are relatively few gold mines, and the global supply has only increased from 85 million ounces in 2001 to 90 million ounces in 2011.

There simply have not been any major new discoveries in a long time. If this trend continues, then eventually gold prices will have to rise as the fundamental law of supply and demand enforces itself on the global gold markets.

Profiting From Gold

There are a number of different ways that investors can earn returns betting on the future price of gold. For the most conservative investors, it is still possible to hold physical gold.

Historically, the metal has not only been an excellent hedge against inflation, but it also performs well during a crisis. The key here would be to buy from a reputable dealer that only charges a small premium over the quoted spot prices.

Perhaps the best way for most investors to become involved with gold investing is to buy an ETF. The most popular gold ETF is the SPDR Gold Shares ETF (NYSE: GLD). Another good option is the iShares Gold Trust (NYSE: IAU).

Both of these ETFs are designed to track the price of the underlying gold, and investors should see significant profits as gold prices rise.

There are also several ways to invest in gold stocks and companies more directly. Admittedly, this is a speculative play, since it focuses on a very narrow segment of the market.

Senior gold mining companies that are actually pulling gold from the ground and operate (or lease) proven mines could be a smart play. Some of the leaders in this category are Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM).

There are also a huge number of so-called “junior” miners. Since these companies are usually smaller and do not ordinarily have much in the way of proven mines or reserves (many are exploration companies), they can be highly speculative. Of course, the profits can be huge if you pick the right company.

The best advice is to tread carefully, since the price of gold seems to be subject to extreme fluctuation. There really is no sure way to forecast exactly what the future will hold.


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