China’s Gold Hunger Likely to Keep Demand High

China overtook South Africa in 2007 as the world’s largest gold producer. At the same time China has increased its gold imports five-fold between October 2009 and October 2010, according to Bloomberg.
As we reported in our April 26 Market Commentary post, Chinese Know Real Value:

The People’s Bank of China—China’s central bank—has for the past year been buying up gold in increasing quantities. And last month it issued a statement urging all Chinese citizens to do likewise.

China’s government recently took steps to deflate a real estate investment bubble that sent apartment rents out of reach for average working people and that has resulted in vast, empty cities of unoccupied apartment and office buildings, as WealthCycles.com reported in February. One of its solutions was to encourage Chinese investors to buy gold. As a result, Chinese demand for gold grew 27% last year, making China the second large consumer of gold in the world, according to a MineWeb.com report this week.


The nation has even unveiled plans to install 2000 gold bullion and coin-dispensing ATMs, according to a MineWeb.com report. Individual withdrawals will be limited to 2.5 kilo or one million yuan ($157), and each machine will hold up to 200 kilograms of gold in varying denominations.

A report by the World Gold Council in May showed that China had edged out India as the largest gold consumer in the first quarter of this year, snapping up 90.9 tonnes of the metal. It also said the demand for jewellery in China soared 21% in the same period.

Albert Cheng, managing director of the Far East at the World Gold Council had reportedly said in March 2010, that the Council had predicted gold demand in China to double by 2020, ``We now believe this doubling may in fact be achieved sooner. China's appetite for gold has increased rapidly over the past few years,'' he said

The resulting demand has created a boom in the Chinese gold mining industry, of which most mining companies are either state-owned or held jointly by state and private owners. But mineworkers for the most part have yet to share in the wealth. Although wages have increased, so has the cost of food and other necessities—fed in part by government and central bank efforts to keep China’s currency low against the dollar and keep interest rates low. And Chinese mines are notoriously unsafe, as reported by Bloomberg in January and again last month by McClatchy Newspapers.
One thing seems clear—China’s need for somewhere to invest its vast excess of currency along with its vast population of potential investors is likely to keep the demand for gold strong well into the next decade.

http://wealthcycles.com/