As we see vast quantities of the world’s gold migrating from West to East, the eyes of investors all around the world turn to China, the country that replaced India at the top of gold demand and consumption internationally, and could easily dominate the gold market, as the World Gold Council predicts demand growing as much as 20% by 2017. But is the Chinese economy strong enough to purchase and hold such a huge load of gold?
The Asian nation’s love for the precious yellow metal remains vigorous. We are witnessing this country transform into an economic powerhouse, recently becoming the world’s largest gold market. Over the last 10 years a new middle class has emerged supported by higher incomes, and consumers have been enjoying their new wealth. As gross domestic product (GDP) began to rise, people started buying more gold jewellery and coins,and demand grew with gift giving for religious holidays, weddings, and celebrations.
The “Love trade”, one of the two main drivers of gold, along with the “Fear trade”, relates to the cultural affinity for the precious metal, particular to the Far East, India, and the Middle East.
In addition to extensive spending on these items, investment demand for the yellow metal augmented as the population sought a hedge against inflation, and the People’s Bank of China accelerated building up its gold reserves to diversify away from the U.S. dollar.
China’s financial issues may bring mixed results
China’s financial system has been suspect for quite some time. The potential for a financial crisis or debt default in China may now be a real possibility, which would add China to a growing list of countries such as the U.S., Japan, and the EU that have unsustainable financial positions.
The issue at hand is that the country retains a state-controlled financial system that allegedly funds the building of ghost cities and useless infrastructure projects, funneling cheap money to well-connected and politically favoured large enterprises. Powered by a steady flow of minimal-interest loans, these companies keep adding capacity, while disregarding profitability, business risks or return on capital. They simply focus on producing more products and expanding their size .They keep employing more and more people, and borrowing more and more money until they eventually collapse under the debt load when liquidity dries up. Such cases have recently been reported, making analysts skeptical about the country’s sustainable growth rates.
If the Chinese financial system becomes unmanageable, it would likely be a “mixed bag” for gold. It could limit consumer demand from the largest gold consumer in the world, but it could also prompt safe-haven demand for gold worldwide which would more than offset any loss of buying from China.
What is really troubling is the fact that China is very secretive about its internal affairs, and sparingly allows any news to leak out, so most of what we know comes from analysts and experts who have visited the country. Also, China does not release any official numbers about its gold imports; instead, other countries report their gold export data to China.
Rest assured that coininvest.com will keep you updated on the news concerning the world’s largest gold consumer.