Asian Gold - China Overtakes India As World's Largest Gold Consumer

June 5, 2014

India has for years held the title of world’s largest gold consumer. However, this year it has had its crown snatched by China. In February, the Wall Street Journal reported that “Chinese demand for gold bars, coins and jewelry soared by 32% to record levels in 2013”, while Indian “growth was curbed by restrictions aimed at narrowing the country’s current-account deficit” [1]. India has had a long love affair with gold, seeing it as far more reliable than the rupee, but recent years have seen a significant economic downturn on a governmental scale, which has seen stringent measures brought in to curb the importation of foreign gold.

Last year, Time reported that India was paying “millions of dollars every year to import gold” [2], which was having a major impact upon the Indian deficit. The major problem, as Indian finance ministers saw it, was that the appetite of the people for gold far outweighed their appetite for things like oil and so on which could be profitably used to benefit the Indian economy. Gold, by contrast, is used as a savings device by many Indians – from the point of view of the government it simply sits in people’s safes, waiting for a rainy day and never generating any profit for the economy. As such, measures were bought in to curb gold importation and trade, which have allowed China to pull ahead in the gold consumption stakes. Whether this will impact the Chinese economy in the same manner as the Indian one remains to be seen – but China and the Chinese attitude is a very different beast to that of India, and early indications are that this trend looks set to continue, and to generate profit for China.

Growth Trends

A report by the World Gold Council outlines the major themes and trends of the surge in Chinese gold demand, and forecasts in no uncertain terms a sustained growth in this area. Indeed, recent trends outlined by HSCBC in Hong Kong [3] indicate a major surge in gold prices through March followed by a drop to consolidation level. The market now seems to be settling into a pattern of steady and sustainable growth, which looks set to last for many years. The predominant reasons behind this growth, according to the report, are to do with Chinese economic demographics. Urbanization, the growth of a stable middle class, and booming Chinese industry are all contributing to an increase in disposable income. Furthermore, Chinese banks are bursting at the coffers with the savings of prudent Chinese citizens.

The Bank of China – which describes itself as “China’s most international and diversified bank” [4] is one of the richest banks in the world, with financial assets which the post-recession West can only dream of. Perhaps most importantly, however, China has a very positive view of gold. Gold is seen as a stable, sensible, and lucrative investment – in contrast to the removed and even sometimes wary attitude with which many Westerners view the metal. In the World Gold Council report, Albert Cheng, managing director of the Council’s Far East operations, states that “The cultural affinity for gold runs deep in China and when this is combined with an increasingly affluent population and supportive government, there is significant room for the market to grow even further” [5].

Attitudes and Investments

The Chinese attitude towards gold is key. Asian nations in general and China in particular view gold as perhaps the only asset truly worth holding. Investing in gold is to invest in the family future – it’s the college fund, the dowry, the pension fund. It’s seen as stable and profitable – a benchmark of value far more reliable than the currency. This may seem an old-fashioned attitude to us in the West, but nonetheless it prevails, and the simple fact is that the Chinese are getting very rich from it. Western financial institutions see gold as an asset which can be sold (largely to Asia), while Asians view it as having true monetary value – value which far exceeds that of currency. By contrast, rather than buying up gold, Westerners prefer to sink their currency into more ephemeral schemes.

In the USA, property is seen as an eminently reliable investment, while in London those in the financial know put their money into investment trusts. In fairness, some of these investments have proven themselves over time. London investment trusts, according to the Financial Times, have “been able to increase dividends for each of the last 10 years” [6] despite the financial turmoil which this period has experienced, and Money state that “placing your money in an investment trust could see your money grow at a rate that outpaces any savings account” [7]. While the American housing market has suffered setbacks, most Americans still view land as the best investment – the general attitude being that ‘they’re not making it anymore’. In China, however, gold rules – and the eagerness of Westerners to sell gold for currency is something which they will happily take advantage of. From a Chinese point of view, swapping Western gold for Eastern money is the equivalent of us receiving shiploads of currency in exchange for something which we can, ultimately, do without.

Shoring Up The Economy

There are other factors at work here. Many Chinese people are concerned about fluctuations in the economy. In particular, the Chinese real estate market is beset with worries that it is experiencing a bubble – and that this bubble is set to deflate. Indeed, in February Forbes reported that house prices “declined in China’s biggest cities for the first time in two years” [8]. Fears for the state of the economy (particularly the housing market) are seeing Chinese investors shore up their savings with the old reliable standby – gold. Most experts agree that these fears are largely unfounded, and seem simply to be built upon an attitude of caution and prudence which mistrusts the exponential boom in the Chinese economy and is convinced that such largesse cannot last. Analysis appears to reveal that the trend for buying gold will increase, as will the Chinese economic upsurge in general, which spells excellent news for gold traders in the West. China has for some years been the one to watch, and this new supremacy in gold consumption appears to be just the latest in its economic takeover of world markets.

[1] Wall Street Journal, "China Overtakes India as Top Gold Consumer" , Feb 2014

[2] Nilanjama Bhowmic, "In India, Gold Glitters but brings Economic Woes", Time, July 2013

[3] HSBC, "Gold Service"

[4] Bank of China, "Bank of China Overview"

[5] World Gold Council, "New report predicts sustained strong gold demand in China in next four years", April 2014

[6] Ellie Duncan, "Investment trusts remain a reliable source of income", Financial Times, May 2014

[7] Martin, "What are the main benefits and risks?", Money

[8] Kenneth Rapoza, "Major China Cities See Real Estate Bubble Deflate", Forbes, February 201

A gold nugget can be worth three to four times the value of the gold it contains because they are so rare.