China’s New Demand for Gold

July 8th, 2010 by

The recent conclusion of the G-20 summit in Toronto has left spectators worldwide scratching their heads about the future of gold. When these events affect precious metals prices, as they often do, they do it through a number of political and economic announcements.

Recently, everyone is listening to China.

Among the many hot-button issues addressed at the summit was China’s un-official peg of the Yuan to the U.S. dollar. The most recent peg ended Monday (June 21st) – it lasted 23 months and saw the Yuan trading at about 6.83 Yuan/Dollar. It was then followed by fluctuating currency, which was mostly the result of speculative concerns.

Many are worried about the effects on trade relations as the US finds China’s exports more expensive, as well as the effect of an increase in Chinese consumer demand. As the Yuan appreciates, China will find internationally-produced goods less costly. All other things being equal, an increase in demand for these products can be expected.

Of particular concern are China’s tastes. As the citizens of the developing nation find themselves with a larger disposable income, they are likely to continue their recently observed habit of purchasing luxury goods.

What does this mean for precious metals? More bullion, jewelry and electronics.

China’s demand for precious metals in the form of gold bullion and gold coins has recently been on the rise. Similarly, demand for gold and platinum jewelry is on an upward trajectory, one of which has already outpaced Chinese production of the metals. This is increasing global demand for precious metals, which in turn drives their prices. Moreover, precious metals such as silver and gold are used in the production of modern electronics such as television sets and audio equipment. Chinese demand for such devices has recently increased, and is expected to continue.

While Chinese central banking policy is less than transparent, most traders don’t expect China to allow the Yuan to appreciate over 20% per annum. Investors worldwide are likely to buy gold in response to expected increases in spot prices. This means changes can be expected to come slowly, giving world markets time to adjust.