China gold imports to touch 260 tonnes in 2010

BEIJING (Commodity Online): The Chinese appetite for gold continues unabated. Gold imports by China—the largest producer of the yellow metal in the world—is set to touch a record 260 tonnes for the year 2010, bullion dealers predicted on Thursday.

Already, the yellow metal import by China has increased five-fold for the last 10 months of 2010. By the end of November 30, the Chinese gold imports stood at 209 tonnes. In 2009, China had imported just 45 tonnes of gold, compared to the massive 350 tonnes of gold that rival India had imported in the same year. India is currently the largest gold importer and consumer in the world.

Bullion industry leaders in Beijing predicted that China will overtake India in gold imports in coming years, as the Chinese appetite for gold jewellery, gold, silver coins and bars is zooming.

“The Chinese bullion industry is growing faster than the Indian bullion industry. There is huge demand for gold from the Chinese hinterland. Gold investment demand in China is just booming,” Thomas Lee, a bullion dealer said.

Lee predicted that gold imports by China will hit 260 tonnes in 2010 as demand for gold coins and gold jewellery items is steadily increasing during the ongoing Christmas and New Year season. “The Chinese government is giving importance to gold investment these days. That is why gold imports are going up. As per the current market trends, the Chinese gold imports will touch around 260 tonnes for this year,” Lee added.

Big demand for gold and the unprecedented rise in gold imports by China is a good chance for several global fund managers, including David Einhorn of Greenlight Capital and John Paulson of Paulson & Co, who have invested heavily in bullion, and top miners Barrick Gold of Canada, US-based Newmont Mining and AngloGold Ashanti of South Africa.

According to Julian Murdoch of Hard Assets Investor, “as more Chinese investors demand gold, that could push prices higher in a more sustainable fashion.”

Here is Murdoch’s take on China’s gold industry:

“After all, today's gold price still sits below the 1980 peak of $2300 per ounce when adjusted for inflation. Remember the simple equation: Higher Demand + Stagnant Supply = Higher Prices Ahead.

In fact, beyond owning physical Gold Bullion, the most interesting opportunities for investors may lie on the supply side of things. Because with China on a gold binge and domestic production, while higher (and the world's No.1 in fact) still not keeping up, Gold Mining producers outside of China may see benefits, even if gold's price remains stable. After all, the gold's got to come from somewhere.

While China is currently the No. 1 gold producer in the world, it is thought to have only 4% of total gold reserves, according to the USGS' mineral commodity summaries report from January. South Africa and Australia hold much higher reserves, at 12.7% and 12.3%, respectively. Even the United States, at 6.4%, has more gold in the ground than China.

So, given that China already can't meet its domestic gold demand, companies operating in areas with more reserves will likely to be the long-term winners.

China's imports aren't up because its domestic production is low. In fact, over the past few years, China has emerged as the world's top gold-producing country, mining 314 tonnes of gold in 2009, according to the World Gold Council. Production for 2010 is expected to remain high; Walter de Wet, head of commodities research at Standard Bank, told the Wall Street Journal that 2010 production is expected to be around 350 metric tonnes.

No, the important story is more about growing Chinese demand, and particularly how China's gold investment demand is growing.

China's portion of global gold demand has risen significantly since 2003. As the country's economy has grown, the Chinese began purchasing more gold, primarily in jewelry. In 2009, jewelry comprised almost 80% of Chinese gold demand; the next nearest sector was investment, at 18%.

Gold investing has never been easier for Chinese households, as the government has begun to relax its control over the gold market. Most investment demand takes the form of gold bars and coins, but last week, the Chinese Securities Commission gave approval for the creation of China's first gold mutual fund, too.

The Lion Global Gold Fund, as it's called, will be a fund-of-funds that will invest in physically backed gold Gold ETFs overseas. It is a new avenue for Chinese investors, and the first one that allows them access to the global gold market.

And then, of course, there are other, more leveraged means of accessing gold, like gold futures. Trading volume on the Shanghai Gold Exchange increased 43% over the first 10 months of 2010.

Still, all things considered, China's per-capita demand for gold is quite low, especially given the high cultural value associated with the metal. The World Gold Council puts Chinese per-capita consumption at just 0.26 grams, much lower than seen in countries such as India or Saudi Arabia, both of which have similar "gold cultures".

Since these imports have already happened and, therefore, already been factored into the price of gold, news of higher Chinese imports is, in some ways, just an interesting hindsight.”