How China is Driving Demand for Gold

The seemingly unstoppable climb in the price of gold — now above $1,500 an ounce — can be attributed to credible long-term macroeconomic forces as well as short-term speculation. Where it goes from here, I do not know; I don’t have a crystal ball. But if demand from China continues apace as some new data contend, the gold bugs may one day be dancing on streets paved with the stuff.

gold barsIndia has long been the world’s largest consumer of gold, mostly for jewelry, especially during the wedding season. But China is scooping up the precious metal at a furious pace, too, according to the latest quarterly report from the World Gold Council. After India, China is the second biggest buyer of gold in the world.

The WGC is a trade group, so it has its own (cough) interests, naturally, but the organization’s latest conclusions, especially regarding China, make a reasonable case for the precious metal and could be great news for gold bugs. Global demand for gold rose 11 percent in the first quarter of 2011, which amounts to nearly 1,000 tonnes of the stuff, worth $44 billion, according to the WGC.

Most of that was driven by investment interest — central banks and investors buying up bullion and coins. If you’re a central bank, it’s wise to diversify your foreign reserve holdings, especially if they’re denominated in dollars, such as U.S. Treasurys (like China). Popular gold ETFs such as the SPDR Gold Trust (GLD) also hold physical gold — not futures contracts — so that’s a source of buying and selling, too.

But the good news for gold bugs regarding China is that the Middle Kingdom’s demand for the precious metal is not only accelerating (and has been for some time), but still represents a relatively small percentage of global gold holdings.

China’s demand for gold — for jewelry, investment and use in technology –  jumped 32 percent in 2010, according to the WGC, even as the local average annual price rose 25 percent. And even after all that, China’s central bank is still but the sixth largest holder of gold in the world — and it accounts for just 1.6 percent of its total reserves. That’s low by international standards, according to the WGC.

At both the consumer and central bank level, the WGC says China is “a land of opportunity” when it comes to gold — but then it’s their job to say that. An investor’s job is to be patient, indexed and judicious in asset-allocation — especially if volatile commodities like gold have any place in your overall portfolio. And making investment bets based on growth in China is a dangerous game. But whether you own the shiny metal as part of your asset allocation or your gambling portfolio, it’s worth knowing that there’s a deep-pocketed investor out there with a taste for gold.