China’s Demand for Gold is on the Rise

May 4th, 2010 by

china-goldAs China continues to develop, investors and market analysts are keeping a close eye on gold prices. The country’s demand for gold continues to rise, and as gold production rates have not, concern over an upward push in spot prices is brewing.

Chinese demand for gold already represents about 11% of global demand at $14 billion per year. According to the World Gold Council (WGC), China’s demand has been rising at an average rate of 13% per annum, but is accelerating quickly. Marcus Grubb of the WGC expects demand in China to double in real terms over the next 10 years.

This demand is growing for a number of reasons. As China graduates to higher and higher levels of economic development, both its businesses and private citizens are expected to increase individual consumption of gold. There are three main categories of gold demand, two of which are particularly applicable to China:

  • Jewelry: While not as high as in countries of similar socio-economic composition, Chinese demand for gold jewelry is on the rise. A growing number of Chinese citizens are able to purchase jewelry containing gold, and this is being reflected in a subtle, but observable increase in demand for gold.
  • Industry: Gold has long had industrial applications. Because of its exceptional electrical conductivity and resistance to corrosion, gold is regularly used in the production of electrical appliances. Because the fabrication of electronic components comprises a huge portion of China’s manufacturing sector, Chinese growth and development points to a larger demand for gold.
  • Investment: All of this growth yields profit. With profit comes the question of what to do with it. As a growing number of private Chinese citizens look to invest in a turbulent global market, they, like other investors are seeking security. The comparatively safe selection of buying gold is an attractive prospect to these investors.

Growing demand would not be a concern if not for the problem of a relatively fixed supply. In absolute terms, the supply of gold is finite (i.e. there is only so much to be mined). While much of it still remains to be uncovered however, there is a measurable rate of production. Approximately 2,500 metric tonnes of gold are mined worldwide every year. This figure has tapered by about 8% over the last two years.

China has responded to this problem by increasing their domestic production of gold by 84% over the last 10 years. This will not prove to be enough to satiate their demand however, as China’s known gold reserves represent only 4% of those known globally. According to the WRC, Chinese demand for gold surpassed their production close to 20 years ago.

As China continues to grow, their demand for gold grows in step. The simple economics of the situation are that demand for any good that outstrips its supply will put upward pressure on prices. Chinese development has global investors watching closely.