Investors in both India and China are becoming increasingly wary of inflation and are buying gold items to hedge inflation risk.
Author: Shivom Seth
Interest in gold from individual investors, particularly in India and China has risen significantly in the last few years.
Metals consultancy GFMS Ltd noted in its Gold Survey 2011, that investors across the globe accounted for 19% of the world’s 166,600 tonnes of gold last year.
But questions remain about exactly how such investment will play out given the massive uncertainties at work in the world economy.
Part of the reason for this is continued concern about the global economy and, in particular the massive debt burden being borne by the US, Japan and Europe.
On Wednesday, April 13, the US dollar index was up 0.14% after President Barack Obama outlined an ambitious budget plan calling for $4 trillion in cuts over 12 years.
Gold kept rising tentatively in the international market, and rose further in India on Thursday morning but, analysts maintain that gold will look to Friday’s inflation readings out of the US and China for further direction.
Traders added that China is set to implement a prudent monetary policy ranging from rate hikes to higher reserve requirements. Given that China could tighten its money supply, the next week would be a testing time for gold, analysts have said.
On April 5, China’s central bank raised interest rates for the fourth time since October 2010, indicating the Asian major’s urgent need to control rising inflation.
Bullion analyst in a brokerage firm in Mumbai, Shailendra Shah said that a new report is expected from China soon, which will indicate the inflation rate in March, industrial output and first quarter economic growth figures.
“This will let us know how Beijing will continue with its policy measures and will also give us an indication of the way ahead for the price of gold,” he said.
A Vaidya, analyst with broking firm Religare Securities told Mineweb that in January 2010, China had recorded an inflation rate of around 1.5%. Some 12 months later, the scenario had changed drastically, with the rate of Chinese inflation climbing to 4.9%.
“The Chinese government has tried to curb the inflation via several measures. One has to understand how this is affecting the movement of gold on the international bourses,” said Vaidya.
He noted that China’s largest bank had started a physically-backed gold savings account in December 2010, aided by the World Gold Council. Account openings have reportedly surpassed 1 million, with more than 12 tonnes of gold having being stored on behalf of investors.
That interest for gold is high in China was also supported by a UBS AG report, that noted purchases by China had increased to 200 tonnes in the first two months of 2011. The nation imported more than 300 tonnes last year.
ICBC, the world’s largest bank by market value, sold about 7 tonnes of physical gold in January 2011, which was nearly half the 15 tonnes of bullion sold in the whole of 2010.
Zhou Ming, deputy head of ICBC’s precious metals department was quoted as saying that China’s largest bank had sold nearly 250,000 ounces of physical gold in January 2011, which was equivalent of 50% of all the bullion ICBC sold last year.
“This is a clear indication that Chinese investors have a voracious appetite for gold. Even the World Gold Council has estimated that China’s gold demand could double in 10 years as more investors embrace the precious metal,” Vaidya added.
That is not to say that India is lagging behind. India’s consumption of gold may well climb to rival that of China, said analysts.
Though global demand rose by 11% to 2,017 tonnes last year, the GFMS has noted that interest from Western consumers was mainly confined to wedding rings.
“The vast majority of demand for jewellery is coming from India and East Asia. If you exclude India from the figures, the increase in demand last year was only 2%, and most of that came from China,” the GFMS official said.
The jewellery sector has shown the strongest recovery in 2010, with annual demand surging to 299 tonnes, which is 17% higher than in 2009. Indian jewellery demand rose 69% during the year to 746 tonnes, while China’s jewellery demand reached a new annual record of 400 tonnes.
India and China represent 40% of world consumption.
Paul Walker, chief executive officer of GFMS reportedly said that in India, a huge amount of demand is a cultural and social imperative. In China, on the other hand, the imperative around weddings is not that strong, he said.
India’s total demand exceeded China’s by 383.5 tonnes last year, narrowing from 496.5 tonnes in 2001, the GMFS data has shown. The report has also noted a growing shift toward physical gold by small investors, all of which will ensure that investment in the precious metal will be more solid in the coming months and less prone to short-term selloffs.