Gold rush

Updated: 2011-11-04 08:53

By Alexis Hooi and Yan Yiqi (China Daily)

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"Gold demand is expected to remain firm through this year and next. Chinese consumers will continue to drive up gold demand as economic growth in the nation is still strong."

Earlier WGC predictions saw gold demand in China doubling by 2020, but there are now expectations of that happening sooner.

The WGC identifies four key factors driving Chinese gold demand in a period of "ongoing global economic and financial uncertainty". These include gold investment being rooted in Chinese culture, impending inflationary fears in emerging markets, the country's central bank being positive on gold and limited domestic investment channels.

Chinese investors already form the second-largest gold investment market in Q2, after India, with demand of 53 tons giving a local currency value equivalent to 16.7 billion yuan, the WGC says.

"Domestic investors were keen to buy into the rising gold price, while high inflation rates also remained a key driver of demand," it says.

"The underperformance of the domestic stock market and a sluggish property sector further fueled purchases of bars and coins."

But analysts have warned that China's bullion investments may slow down this year compared with sharp growth in 2010 as record-high gold prices raised the risk of price volatility. Hit with a recent slew of restrictions on residential property purchases, Chinese investors might also be turning to the commercial and industrial property market instead with its higher returns compared with gold and the stock market.

Still, Sun Fengmin, the secretary-general of the Gems and Jewelry Trade Association of China, says the global economic situation has pushed investors in the country to look for safer investment channels.

"In the period of global economic and financial uncertainty, gold's role as a monetary asset, global currency and risk diversifier all make it an attractive international asset class for domestic investors," Sun says.

Zhang Tiantian, 29, a government official in Hangzhou, capital of Zhejiang province, has been buying gold coins for her three-year-old daughter since she was born. The first gold coin she bought in 2008 cost 10,000 yuan and the same weighted one she purchased this year set her back 16,000 yuan.

"I buy one gold coin for her every year," Zhang says. "I am investing for her future." She says gold coins are relatively resilient to price fluctuations.

"I will keep buying her the coins until she is 24, whether prices rise or fall. Some of my friends choose to buy stocks or funds for their children, but I don't have faith in these," she says.

Sun Fengmin agrees that the surge in Chinese gold purchases is rooted in culture.