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China's Gold Demand "Faces 3 Risks" to 20% Growth

Long-term boom in China's gold demand "solid, on-going," says World Gold Council...
CHINA's world-leading gold demand is set to grow a further 20% by 2017, according to a detailed new report from global market-development organization the World Gold Council today.
But that growth faces risks short term, adds the report – China's gold market: progress & prospects – as China's political leaders attempt to replace its investment and export-led economic growth with stronger domestic consumption and lower borrowing.
  • The growing risk of a credit crunch after China's huge debt boom, which "would depress GDP and consumer spending";
  • A move to positive real interest rates "would represent a more direct threat" to jewelry and gold investment demand. Bank deposit rates have now lagged Chinese inflation since 2003;
  • 2013 gold jewelry demand growth was so strong – thanks to Spring 2013's Gold Crash in prices – that "a degree of consolidation this year would be no surprise."
Analysts at Goldman Sachs last month said gold bullion may account for $60 billion-worth of so-called "trade financing deals" in China, three times as much as copper – previously highlighted as a key commodity in shadow-banking loans made against unpaid for collateral. Feeding into the World Gold Council's report, Hong Kong consultancy Precious Metals Insight says the total may have reached $40 billion (some 1,000 tonnes) by end-2013.
China's decade-long run of "ultra-low nominal interest rates" has meantime seen cash savers lose value in real terms, the World Gold Council's report explains. That "has underpinned the massive growth in demand for gold investment products," and analysts have long recognized the link between real US interest rates and Dollar gold prices.
Data last week from Chow Tai Fook, the world's most highly valued jewelry-store business, confirmed a slowdown in China's demand, with same-store sales down 9% in Jan-March from the same period of 2013.
Discussing these and other risks in light of China's "deeply rooted pro-gold culture" however, the World Gold Council believes "the spotlight will be on  China for many years to come."
Citing projections by Ernst & Young for China's middle-class to grow by two-thirds to 500 million by 2020, "The pool of private savings is [already] vast," says the report. Yet "overall allocation to gold is tiny by comparison."
Household bank-account savings total some $7.5 trillion, some 25 times the size of consumer gold holdings, the report says. The equivalent ratio in India – formerly the world's No.1 consumer nation – is 1:1.
Based on data and analysis by Precious Metals Insight, the World Gold Council's report foresees total private-sector demand for gold of 1,350 tonnes by 2017, up by 20% from last year's best estimates.

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