China is Gold’s Future

The new report “Gold in the Year of the Tiger” from the World Gold Council (WGC) predicts that gold consumption in China could double in the coming decade as a result of rising demand for jewelry, hard-asset investments and industrial uses.

This forecast seems reasonable, and it lines up with what I’ve long been saying about the profound evolution in China’s economy – domestic consumption is replacing exports as the growth engine as more poor Chinese move up into the middle class and from there into the ranks of the wealthy.

Tens of millions of people in China are joining the middle class every year – by some estimates, they already number more than the entire U.S. population and could double in the next decade.

They are buying more spacious and better-outfitted homes. They have made China the world’s largest automobile market, and a wide range of brand-name Western luxury items are available even in provincial cities.

China has a centuries-long cultural affinity for gold, so it makes sense that more middle class and wealthy would mean more gold sales.

The line on the WGC chart above shows how investment demand for gold has rocketed up from next to nothing in 2001 to 80 tonnes (2.6 million troy ounces) last year, with the sharpest upswing coming after trading rules were liberalized in mid-2007. Over the same period, China’s GDP roughly tripled. The Chinese are famous for their high savings rate, and the chart shows how important gold has become as a store of their growing wealth.

The next chart compares China’s annual gold jewelry consumption to more than a dozen other countries. Last year, China consumed 347 tonnes in jewelry, which was about 30 tonnes more than the country’s total gold production (tops in the world). But on a per-capita basis, China is near the bottom of this list.

The World Gold Council points out that, if China matched Saudi Arabia on a per-capita basis, it would consume an additional 4,000 tonnes of gold jewelry each year. That’s more than last year’s demand for the entire world (3,386 tonnes), so even the most enthusiastic gold devotees would probably agree that it’s not a realistic number.

But given projections that the Chinese middle class will double in the next decade as China’s economic growth generates a wider distribution of wealth, it’s not farfetched to think that its gold consumption could also double.

It is farfetched, however, to think that China’s domestic gold output could keep pace with demand growth – more and more of the world’s gold production (on a declining trend for years) would have to be diverted to the Chinese market, and the result could be a significant impact on gold prices in the years to come.

About Frank Holmes 264 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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