China and India - the Asian gold-buying phenomenon
The ever growing purchasing power of the Chinese and Indian general populations throws bearish fundamental analyses of the gold market into disarray.
Posted: Monday , 15 Feb 2010
China and India are the world's two largest consumers of gold - and the former is the world's largest gold miner. To many the future path of the gold price is inextricably related to the world's two most highly populated nations, both of which are undergoing internal growth at a phenomenal rate in comparison with anything Western nations are able to achieve - even in a major turn round from the recent recession. And such a turnaround seems increasingly far away.
What is particularly important for gold market followers is that both nations' populations seem to have an inbuilt propensity to hold gold. For India this has always been the case. For the Chinese it is a more recent phenomenon, perhaps because it is only recently that much of the general populace has had the wherewithal to invest, but basically it is a desire which is prevalent throughout virtually all Far Asian nation states.
Both China and India have populations which dwarf those of Western nations, and both are becoming increasingly urbanised. In both countries the people are building wealth at an unprecedented rate which means more and more people are entering the consumer classes. The rise in sales of perhaps previously unattainable items in urban China has been phenomenal. Mobile phones are glued to almost every ear, TV in the households is virtually the norm rather than the exception, white goods are seeing huge increases in sales and Chinese auto demand is booming to the extent sales are exceeding those of King Car - the U.S.A. Indian sales growth too is also surging and although still well behind China in its development, the potential is equally as big.
Some five months ago Mineweb published an article which went virtually viral on the internet noting that Chinese state controlled entities were actively promoting gold and silver as investments to the general populace - see 2009's Top Story: China pushes silver and gold investment to the masses. A little later we referred to Indian state entities doing much the same thing - see In India even the Post Office sells gold coins.
Now even if a tiny fraction of India and China's huge populations are seduced into putting some of their savings into gold - and in both countries there is a culture which supports savings (of which gold can be seen as a part) which has long been forgotten in the West. What an impact this can have on the gold market globally. 5 million sales of 10 gram gold bars or coins (a very small investment for a tiny proportion (0.2%) of China and India's combined population of some 2.5 billion people) amounts to 500 tonnes of gold - a little more than 20% of global gold production. Whatever some analysts and economists say about gold fundamentals not supporting a gold price increase, the likely growth in demand from personal investment in the East could confine such basic statistical analyses to the rubbish heap.
And this does not take into account any Asian Central Bank gold purchases. India certainly set a trend with the purchase at one fell swoop of almost half the IMF gold on offer, China is known to be building up its reserves, but no-one, apart from the Chinese themselves, really knows the extent of its increase in gold holdings in various government coffers, and other Eastern and Middle Eastern nations also have a propensity towards buying gold, albeit perhaps on a much smaller scale, as they try to diversify some of their national reserves away from the U.S. Dollar, which is seen as in a long term value decline.
So where does this leave us on the gold front? If the above prognosis is anywhere near the truth then current fundamental analyses are bunk, Nouriel Roubini‘s take on the situation included! Let the economists stick to fundamental analyses on global monetary flows and economies which tend to follow more set patterns. There are too many unknowns and uncertainties involved in tracking fundamentals for a commodity like gold where much of the demand can be down to a large section, and a growing one in terms of wealth and numbers, of the global population's inbuilt perception of seeing the yellow metal as the ultimate store of wealth, or even as adornment to demonstrate their wealth and position to their fellows. Normal production and consumption statistics can only form an incomplete part of the overall picture.
Yesterday was the start of the Chinese New Year - the year of the Tiger - and a Metal year to boot. Make of that what you will. According to some Chinese horoscopes the year is likely to be a turbulent one, but also beneficial to organizations associated with Metal, which would, of course, include gold mining. With Metal years supposedly also particularly associated with silver and gold among others, this could bode well for the precious metals this year. After all it's not whether we believe in the Chinese horoscope or not - the key is whether a significant proportion of the 1.35 billion Chinese believe in what it portends for the year ahead and act accordingly!