China May Match India as World’s Biggest Gold Consumer on Investor Demand

March 23rd, 2011 by

China May Match India as World’s Biggest Gold Consumer on Investor Demand

By Madelene Pearson – Mar 23, 2011 3:21 AM ET

Francisco Blanch, global head of commodities research at Bank of America-Merrill Lynch

Chinese consumption of gold may climb to rival that of India, the top user, as investors buy the metal as a store of value, said GFMS Ltd. and INTL FCStone.

Demand in China, the world’s second-biggest economy, almost tripled to 580 metric tons last year from 206 tons in 2001, data from the producer-funded World Gold Council show. Use in India may slump 5 percent to 26 percent this year from 963 tons in 2010, Morgan Stanley said in a report yesterday.

Bullion soared to a record $1,444.95 an ounce on March 7 and rallied 30 percent last year for a 10th annual gain as investors sought to preserve their wealth against inflation, Middle East unrest and currency debasement. Consumer prices in China climbed 4.9 percent in February from a year ago, exceeding the government’s 4 percent goal for the full year.

“The level of interest in gold as an asset class is just amazing,” Jeffrey Rhodes, global head of precious metals with INTL FCStone in Dubai, said in an interview. “There is potential for China to catch up to India.”

Protests partly linked to record food costs erupted across North Africa and the Middle East this year, spurring conflict in Libya and toppling leaders in Tunisia and Egypt. The unrest pushed crude oil above $100 a barrel, increasing concern that global inflation would accelerate.

Purchases by China increased to 200 tons in the first two months of 2011, according to UBS AG (UBSN) on March 1. The nation imported more than 300 tons last year, People’s Bank of China Vice Governor Yi Gang said in Beijing Feb. 26.

Property, Cars

“We’re seeing healthy demand” this year, Wang Lixin, China general manager at the World Gold Council, said yesterday. “Investors continue to find gold an attractive investment because of government restrictions on other big-ticket investments such as property and cars.”

Lion Fund Management Co., the first such vehicle in China to invest in gold-backed exchange-traded products overseas, received approval to as much as double its fund raising, media affairs manager Yang Zi said on March 7.

The company had raised more than 3.2 billion yuan ($483 million) for the fund, using up the $500 million initial quota from the State Administration of Foreign Exchange, a company statement said on Jan. 11. Gold investment in China may gain 40 percent to 50 percent this year, the council said Feb. 17.

Cultural Imperative

Immediate-delivery gold was little changed at $1,429.26 an ounce at 3:19 p.m. in Singapore today and has advanced 29 percent in the past year. India and China represent 40 percent of world consumption, according to council data.

“In India a huge amount of demand is a cultural and social imperative; you have to buy gold for the dowry and the wedding and that is something hard-wired into Indian society,” Paul Walker, chief executive officer of industry researcher GFMS, said in an interview from London. In China, the imperative around weddings “is less hard-wired,” he said.

India’s total demand exceeded China’s by 383.5 tons last year, narrowing from 496.5 tons in 2001, council data show.

“There’s absolutely no reason not to believe that at some juncture Chinese demand might go above that of India,” he said. FCStone’s Rhodes said demand in China and India could converge in the next five years.

China displaced South Africa as the world’s biggest gold producer in 2007.