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China Replacing India as Premier Gold-Consumer

04 august 2009

For several decades, Indian gold demand has dominated the global gold market, to the point where it's own consumption-cycle became the “seasonal” indicator for gold, writes. As Indian “wedding season” began in the fall, gold typically experienced a surge in the price. Then, in the spring, as wedding season drew to a close, gold would reach its seasonal peak.

In late April or May, as Indian demand dropped off, so too would the price of gold (usually) begin to swoon. The price would bottom in June or July, trade sideways for a period of weeks or months, and then begin to show strength again as Indian demand returned, to begin a new “season”.

However, over the last year, the picture of global demand for gold has changed radically – in several ways. To begin with, apart from the 3rd quarter of last year (when Wall Street's take-down of global markets resulted in even gold going briefly lower) Indian gold imports have virtually disappeared.

There have been two other important changes in the global gold market, which have completely offset the stunning change in Indian consumption. The first change is gold's official metamorphosis from a “jewelry” market to an “investment” market. As noted several months ago, in 2008 for the first time in decades, “investment” demand exceeded “jewelry” demand.

This was primarily due to a huge jump in investment demand, rather than declining jewelry demand, as in the fourth quarter of 2008, retail investment demand was a stunning 400% higher than the same period a year ago. Overall, investment demand more than doubled last year. However, even that overstates the importance of jewelry demand to the gold market.

The majority of retail consumption in the world is based in Asia. In part, this is “cultural heritage”, but it is also a practical matter. For example, of the hundreds of millions of Indian “peasants”, only a small percentage have access to banking services. Thus, the “savings accounts” for these people is their gold (and silver). It is typically fashioned into jewelry, so that it can be worn (a convenient means of carrying it), but this “jewelry” is all about financial security rather than ornamentation.

The importance of this reality is that while Indian buyers may stay away from the gold market over the short term, over the longer term, Indian peasants must have additional gold and silver to store their wealth. Already, indications are that Indian demand is shifting somewhat into cheaper silver (yet another future drive for that market).

This brings us to the last major change in gold demand fundamentals: the rise of China as a dominant, international “player” in gold. It began with China rapidly expanding its gold production, in order to become the world's largest producer – the only large producer in the world which has been able to expand its production. Indeed, most other large, global producers are seeing steady declines in their own production, despite record nominal prices for gold.

However, instead of Chinese gold becoming a rare, new source of supply for the global gold market, it now appears that China was secretly purchasing most (if not all) of that new gold for itself. The Chinese government recently announced that in just six years, it had increased its official, national gold reserves by 76% - as of the end of 2008.

Meanwhile, as China became the world's largest producer of gold, while the Chinese government has been the biggest, national acquirer of gold, now individual Chinese investors appear to be following its government's example. In a recent Bloomberg article, the World Gold Council reported that China was poised to overtake India this year, as the world's largest gold-consumer.

In the first quarter of this year, Indian domestic demand was only two tons greater than that of China – little more than 2%. This means that China will likely pass India next quarter, and barring a significant reversal in India, become the new permanent leader in global gold consumption. India's bullion dealers must now begin to contemplate this new paradigm for the global gold market: that they are now competing for available supply with 1.2 billion Chinese consumers (along with other retail investors all over the world).

Once that realization sinks in, it must result in a change in the psychology of Indian buyers (at both the wholesale and retail level). As the fantasy of “cheap gold” becomes nothing but a memory from the past, Indian gold demand will change from providing primary support for the price of the gold, to becoming another major driver in higher gold prices.

Thus apart from the ever-present monetary/economic arguments for holding gold (and silver), the supply/demand fundamentals for the precious metals market continue to be among the strongest (if not the strongest) for any commodities on the planet. With China having clearly begun another strong, economic growth cycle and with economies such as that of the U.S. still a grave concern, gold demand can only continue to soar.

Yekaterina Davydova, Rough&Polished Asian Bureau Editor in Beijing