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China's gold demand at 200 metric tons in first two months of 2011

By: Roman Baudzus

The Chinese gold demand is rising at seemingly unstoppable levels, with domestic gold purchases growing to 200 metric tons in the first two months of the year. Chinese firms and consumers continue to be concerned regarding inflation developments and fear a future devaluation of their savings and capital investments. The People´s Bank of China (PBC) has taken measures to fight the domestic inflation, but these have so far been insufficient in controlling the situation. The central bank probably waited too long to avoid savers fleeing from their paper money assets.

Throughout the month of January, China’s inflation climbed a further 4.9% compared with the same period of the previous year. This followed a strong rise during H2 2010. Although China had become the largest gold producer in the world in the past year, demand amongst domestic investors is rising without end. Furthermore, the country’s gold imports are also on the rise. As the World Gold Council (WGC) announced, China's gold demand rose to 200 metric tons in the first two months of the year. These are extraordinary figures compared with a total demand of 579.5 metric tons throughout 2010. According to analysts at Swiss based investment bank UBS AG, this development will positively affect the gold price, which could well climb to US$1.500 per ounce in the coming six months. In a telephone conference yesterday, Peter Hickson, commodity strategist at UBS, commented that China is likely to remain a driver of the gold price in the future.

The recent Chinese New Year festivities highly exceeded previous forecasts for the demand development. A similar development could also be observed in India during recent months, where the enormous demand for precious metals throughout the wedding season put gold and silver prices at record high levels. Another factor are the recent revolutionary upheavals in the North African countries, where the current geo-political situation is driving more and more investors into safe havens, which particularly included gold and silver. Investors expect enormous problems at the international currency markets, which will likely keep the markets on their toes. Yesterday it was officially announced that China intends its domestic currency, the yuan, to become a second global reserve currency besides the US dollar, a move, which means the country's importers and exporters should be allowed to conduct international deals using the yuan. The PBC also aims to let the yuan float freely against other currencies in the near future.

Due to the continued measures of quantitative easing by the international central banks, there has been a flight into real assets. Yesterday, Ben Bernanke, chairman of the United States Federal Reserve, said that the Federal Reserve was already considering a third round of quantitative easing. These comments triggered an increase in prices in the precious metals sector of the commodities market, as investors tried to hedge against a future devaluation of currencies by purchasing precious metals. An example for this development is Vietnam, which was shaken by a high inflation, after the nation's central bank devaluated the domestic currency, the dong, for the fourth time in a row. In China, it is expected that gold demand will rise by 40 to 50% this year compared to last year, as there are simply no other investment alternatives for investors and savers, according to Wang Lixin, China's representative at the WGC, a rather conservative forecast, he added. It would not come as a surprise if the domestic Chinese gold demand rose to even higher levels by year-end.

Roman Baudzus
www.goldmoney.com

Posted Thursday, March 03 2011