Rising gold prices are not exclusively a “Made in America” phenomenon. In the past year and longer, rising jewelry and investment demand for gold from China and India has been at least equally important in pushing gold’s price much higher.
China’s great leap into gold
Private gold investment in China was banned and the gold market was tightly controlled for more than five decades following the Communist Party takeover in 1949. But ever since the legalization of gold investment and the gradual liberalization of the market beginning in 2002, the Chinese appetite for gold has been growing by leaps and bounds. 2010 was no exception, and we can expect rising demand for many years to come with important implications for the future price of gold.
China has now become a powerful driving force in the world gold market, alone accounting for a few hundred dollars in the thousand-dollar gold price advance in the years since liberalization in 2002.
Chinese retail investment demand for physical gold rose by more than 75 percent to 170 tons in 2010. At the same time, demand for gold jewelry grew by some 10 percent or so in 2010 to 380 tons. While the country has seen a significant rise in domestic mine production, so much so that it is now the world’s biggest gold-mining nation, imports are rising to fill the supply-demand gap.
I have no doubt that China’s imports of gold from the world market have had, and will continue to have, an important effect on the world market and U.S. dollar price.
Chinese gold demand — and imports from the world market —are likely to continue growing in the next few years reflecting demographics, urbanization, strong economic growth, rising personal incomes, worrisome inflation, and the continuing development and maturation of the gold-market infrastructure.
Indian demand hot as curry
As in China, torrid economic growth and rising inflation have fueled rising demand for both gold jewelry and physical investment products in India. The year’s plentiful summer monsoons brought healthy 2010 autumn harvests and, as a result, income to the agrarian sector was the best in years. And, importantly, the agrarian sector accounts for a lion’s share of the country’s gold consumption.
Imports of gold surged during 2010’s third quarter, so much so that total 2010 imports could reach 750 tons, up from 595 tons last year — putting India, for now, far above China as the biggest gold-consuming nation.
India has historically been a very price-sensitive market. Typically, buying interest falls off as prices rise and, at higher prices, India women are known to take profits, cashing in their bangles and chains, so much so that Indian gold scrap can be an important short-term source of supply.
In contrast to this historical experience, demand in the past year has proven to be much less price sensitive. Even at recently prevailing all-time high prices around $1,400 to $1,430, Indians have remained willing buyers, and in December when gold had fallen into the $1,380 to $1,390 range buying interest picked up quite noticeably, suggesting a psychological re-evaluation of gold’s future price prospects with important implications to the world market and U.S. dollar price.
Jeffrey Nichols is a recognized expert on the economics of precious metals markets. He is managing director of American Precious Metals Advisors (www.NicholsOnGold.com) and also serves as senior economic advisor to Rosland Capital LLC (www.RoslandCapital.com), a retail dealer of precious metals investments and numismatic coins.