Chinese rush to gold as inflation fears bite

While recent statistics show that China's gold imports have risen dramatically this year, despite China itself being the world's largest gold producer with mine production still rising to, anecdotal evidence suggests that this may just be the tip of the iceberg as Chinese people are, apparently, rushing to buy gold as an inflation hedge.

A report in the Financial Times suggests that gold purchasing by individuals is turning into such a rush - and the rising price, if anything, is - contrary to Indian experience - fuelling the intensity of gold demand there.  With the ever-rising growth in the numbers of middle-income Chinese as the country's wealth drips down to the people, this source of gold demand is becoming increasingly relevant to the global market.  China is expected to surpass India as the world's leading gold purchaser within the next few years and with the kind of surge in popularity of gold bars and coins, rather than jewellery, there this could even take place sooner rather than later.

As an indicator of the kind of demand being seen in China, FT Reporter Leslie Hook notes in a despatch from the Chinese capital: "At Beijing's largest gold shop, the queues to buy bullion mini bars have turned into scrums as customers jostle for one of the country's hottest commodities. The phone behind the bullion counter rings off the hook as a frantic sales clerk tries to answer buyers' questions. The electronic chart displayed behind him says it all: the price of gold is rising and Chinese investors, worried about inflation, want in on the trend."

For the global gold market this is very significant as momentum in the Western gold market appears to have slowed dramatically.  As Mineweb writer Rhona O'Connell noted yesterday (see: Gold ETF momentum slows above $1,300 - can silver investment be sustained?) since gold hit around $1300 an ounce ETF inflows and outflows have been broadly in parallel, and it has probably been ETF demand which has been the principal demand driver for gold over the past few years.  Gold and silver bullion sales also seem to be slowing in the west as confidence in economic recovery, however unjustified, is beginning to return and people are looking elsewhere to invest.

What is interesting about the Chinese experience is that the apparently huge demand from the public - initially stimulated by state institutions (see: China pushes silver and gold investment to the masses ) - is due to fear of inflation.  Maybe the Chinese are more sophisticated in economic theory than their Western counterparts, but the levels of new money being pushed into the Western (and Japanese) economies by government has to have severe inflationary consequences down the road.  It's just the Western general population hasn't yet understood this consequential result.  Give them time!  In China inflation is already beginning to impact as the western stimuli are beginning to raise inflation in China rather than in their home countries - so far.

Most western observers also believe that the Chinese state is absorbing all of that country's gold production and taking it into reserves - even if this is not actually being reported in official statistics, but being held in an account other than that of the Central Bank until China chooses to make the information public.  What this means is that a whole hunk of global production is not appearing on the open market, which effectively tightens supplies.  Taken together with the surge in Chinese demand this will have a serious impact on what becomes available on the open market - and with some Central banks having become buyers - and a dearth of sellers from this source - gold's fundamentals would seem to be altering in favour of continuing price rises for the metal.

China's burgeoning demand is now likely to continue to build - at least until the Chinese New Year (which begins on February 3^rd next year) - and will help to maintain the gold price at or around the current level or better.  Indeed with Western activity already beginning to wind down ahead of the Christmas and Western New Year holidays making trading thin in New York and London, there could be a positive impact on price developing by the calendar year end.