CRISISBOOM

In this world of chaos and tumult, the Chinese people know what to do to preserve their wealth – they buy gold. When Americans finally wake up, if that ever happens, there is a good chance that there won’t be any gold to buy at any price.

By David Lew
BEIJING (Commodity Online):An unprecedented investor interest in gold is turning Chinese households as store houses of wealth these days as people are on a gold buying spree across the rural and urban areas of the dragon country.

Bundles of news stories are these days written on the gold buying spree by the Chinese households. If not an overstatement, it is now a fact that people’s houses in China have soared in value thanks to the rising prices of gold in the last two years.

“People in China are buying gold like never before. They believe that gold is the best form of investment. So they are buying gold coins, bars and jewelery items and stocking up safely in their homes,” says Beijing-based bullion dealer J Kim Lee.

Quoting the World Gold Council figures, Lee says that if the gold buying spree by Chinese households goes on at the current pace, private gold Chinese demand may overtake Indian gold demand by 2014, giving the world’s two most populous nations two ounces of gold in every five sold worldwide that year.

Indian households are estimated to be owning 15,000 tonnes of gold. India continues to the largest consumer and importer of gold worldwide.

According to precious metals analyst Steven Jon Kaplan, a significant percentage of gold’s price increase in 2009-2010 was caused by the incremental demand from Chinese buying. “The real question, then, is what will happen with this demand going forward, and which factors will be the most important in gauging future trends,” he says.

“People’s houses have soared in value in China. They feel much wealthier and have therefore been more eager to spend their income on nonessential items like gold. However, we know that all bubbles must eventually burst, and the most lopsidedly exaggerated ones are going to suffer the worst percentage collapses. In my opinion, the most important question in the gold market today is how the price will be affected by a plunge of 50% or more for Chinese real estate, and whether there are any clues as to when this will occur,” says Kaplan.

China’s craze for gold is surprising many people these days. Some years back, people in China were not allowed to own much gold, thanks to the strict economic rules that the communist China had stipulated. China still remains a one-part communist country; but these days, the Chinese government allows its citizens to buy and possess as much gold as they like.

In the past, gold production in China used to lag behind South Africa, United States and Australia. But in 2007, China overtook all these countries to emerge as the largest gold producer in the world. And Chinese government announced early this year that the country wants to increase its gold reserve holdings. To put more specifically, China is eager to replace US dollar as its foreign exchange reserve with gold.

While the Chinese government has been officially trying to mop up gold reserves, people across the country are simply buying gold. Some bullion analysts have already forecast that eventually China will emerge as the largest gold consuming country, an honour that India now holds.

Whatever be the reasons for China’s massive household savings rate (a BIS paper last month suggested it’s because household earnings are falling as a proportion of national income), a recent World Gold Council report shows that private consumers are putting ever-more money into physical gold.

According to the World Gold Council, gold demand in China has risen by 26% in the last one decade.

In the 30 months between Jan. 2008 and June 2010 alone, private households bought more gold (1057 tonnes) than the central bank reports in its entire gold reserves (1054 tonnes).

Chinese household savers have bought almost half as much gold since the global financial crisis started in mid-2007 as all investors living in the developed West.

Nearly 16% of global gold demand went to Chinese households between July and October in 2010, rising from the previous three-year total of 14%.

China’s central bank, the People’s Bank of China, does not disclose the annual amount it purchases for its reserves, but uses an agency to make these purchases on its behalf. Every five years, this agency delivers the gold bought to the bank, which then announces its increase. The last time it did this was three years ago and it reported an increase of 454 tonnes, averaging out to 91 tonnes a year.