China's Gold Investment Demand Rising

Strong growth showing in China's Gold Investment demand...

NEWS BROKE last week that China's gold imports for the first 10 months of the year had risen to almost five times 2009's total levels, writes Julian Murdoch at Hard Assets Investor.

China doesn't usually comment on its imports and Gold Bullion reserves, so any news is useful – and numbers like these are downright surprising.

The head of the Shanghai Gold Exchange, Shen Xiangrong, told a conference in Shanghai that China had imported 209.7 tonnes of gold during the first 10 months of the year. To put that in perspective, the World Gold Council estimated total Chinese imports for 2009 at a mere 45 metric tonnes.

As a comparison, the SPDR Gold Trust, the world's largest physically backed gold ETF, had inflows of 159.5 tons over the same 10-month period.

Don't be fooled: China's imports aren't up because its domestic production is low. In fact, over the past few years, China has emerged as the world's top gold-producing country, mining 314 tonnes of gold in 2009, according to the World Gold Council. Production for 2010 is expected to remain high; Walter de Wet, head of commodities research at Standard Bank, told the Wall Street Journal that 2010 production is expected to be around 350 metric tonnes.

No, the important story is more about growing Chinese demand, and particularly how China's Gold Investment demand is growing.

China's portion of global gold demand has risen significantly since 2003. As the country's economy has grown, the Chinese began purchasing more gold, primarily in jewelry. In 2009, jewelry comprised almost 80% of Chinese gold demand; the next nearest sector was investment, at 18%.

But now Chinese Gold Investment demand is growing as well. Albert Cheng, the managing director of the World Gold Council's Far East department, told Bloomberg:

"The investment demand we estimate already reached 120 tonnes in the first three quarters, and it usually spikes in the fourth."

Market-development group the WGC estimates investment demand to hit 150 tonnes this year, compared with 2009's 105 tonnes. Ten 10 years ago, China's Gold Investment demand was in the single digits.

Gold Investing has never been easier for Chinese households, as the government has begun to relax its control over the gold market. Most investment demand takes the form of Gold Bars and coins, but last week, the Chinese Securities Commission gave approval for the creation of China's first gold mutual fund, too.

The Lion Global Gold Fund, as it's called, will be a fund-of-funds that will invest in physically backed gold Gold ETFs overseas. It is a new avenue for Chinese investors, and the first one that allows them access to the global gold market.

And then, of course, there are other, more leveraged means of accessing gold, like Gold Futures. Trading volume on the Shanghai Gold Exchange increased 43% over the first 10 months of 2010.

Still, all things considered, China's per-capita demand for gold is quite low, especially given the high cultural value associated with the metal. The World Gold Council puts Chinese per-capita consumption at just 0.26 grams, much lower than seen in countries such as India or Saudi Arabia, both of which have similar "gold cultures".

Since these imports have already happened and, therefore, already been factored into the price of gold, news of higher Chinese imports is, in some ways, just an interesting hindsight. As Jeff Christian, managing director at CPM Group, told the Wall Street Journal:

"Everybody in the gold market knew there was a surge in investment demand, but they didn't know it was China."

But as more Chinese investors demand gold, that could push prices higher in a more sustainable fashion.

After all, today's gold price still sits below the 1980 peak of $2300 per ounce when adjusted for inflation. Remember the simple equation: Higher Demand + Stagnant Supply = Higher Prices Ahead.

In fact, beyond owning physical Gold Bullion, the most interesting opportunities for investors may lie on the supply side of things. Because with China on a gold binge and domestic production, while higher (and the world's No.1 in fact) still not keeping up, Gold Mining producers outside of China may see benefits, even if gold's price remains stable. After all, the gold's got to come from somewhere.

While China is currently the No. 1 gold producer in the world, it is thought to have only 4% of total gold reserves, according to the USGS' mineral commodity summaries report from January. South Africa and Australia hold much higher reserves, at 12.7% and 12.3%, respectively. Even the United States, at 6.4%, has more gold in the ground than China.

So, given that China already can't meet its domestic gold demand, companies operating in areas with more reserves will likely to be the long-term winners. 

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