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Why is China Buying Gold?

June 22nd, 2011 No comments

An article on Bloomberg.com stated that China purchased 200 metric tons of gold in the first two months of 2011. In 2010, demand from China equalled 579.5 tons so China is on track to double its gold purchasing in 2011. China’s voracious appetite for gold will continue to influence the price of gold for several months even though China is the world’s largest producer of gold.

“The trend is undeniable, gold demand in China is rising rapidly,” Walter de Wet, Standard Bank head of commodity strategy, told The Wall Street Journal in December 2010. And The World Gold Council estimates that China’s gold demand could double in 10 years.

So why is China buying so much gold? Eight reasons.

  1. Inflation was 4.9 per cent in China in January 2011 and gold is a hedge against inflation. So there’s internal pressure to buy gold.
  2. Inflation is starting rear its head in Europe and also in the United States. Again, the Chinese are heavily invested in European and American economies and see gold as a hedge against inflation in Europe and the United States.
  3. American fiscal policy. To deal with its financial struggles, the Federal Reserve has been using ‘quantitative easing’ which is ‘printing money’ and this devalues the dollar. China has invested in American Treasury Bonds. Gold counteracts declining bond yields.
  4. Middle Eastern unrest is likely to continue due to steeply rising food prices and political factors. This could result in another oil price spike which could result in another gold price spike.
  5. Chinese people are worried about internal inflationary pressures. The government has promised to raise food supplies and address an increase in property prices. But the Chinese people, currently losing 1-2% in a savings account, are buying gold.
  6. Gold is so popular in China that more than 1 million people have opened a physical gold linked savings account created by The Industrial and Commercial Bank of China Ltd. The bank stated it has more than 12 tons of gold stored on behalf of investors.
  7. Last year, the Chinese government made it easier for financial institutions and individual investors to buy gold; more banks are importing and exporting gold. Previously, China’s central bank controlled the country’s gold market; the ‘dragon’ of demand for gold in China has now been unleashed at the retail and institutional levels.
  8. There’s no guarantee the dollar will remain the world’s reserve currency; if the dollar collapses, gold provides a strong ‘plan B.’ China realises the potential of the declining influence of the dollar and has been buying gold. China is one of many countries looking to diversify monetary holdings.

Other countries, especially India, are big players in the global gold market but China will continue to influence the gold market for the next several months. We believe China will continue to buy gold and their desire for gold will put upward pressure on prices.

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