China has made its move to take the No. 1 spot as the largest consumer in the world’s gold market. China surpassed India in the first six months of 2012 and now buys 21 percent of all gold, according to the World Gold Council. With rising demand for gold in China, the most populous nation in the world looks to expand its gold trading markets.
Gold analysts credit the easing of gold ownerships rules, the expansion of the Shanghai Gold Exchange and various gold investment opportunities offered by Chinese banks as the reason why China is now the largest buyer of the precious metal. China bought 10 percent of the gold supply back in 2007. That share now stands at 21 percent.
Yuan-based private equity firms took a big hit earlier this year. Commodities needed for construction also fell due to the economic slowdown in China. Thus, the Chinese have turned to the yellow metal to fill those gaps. Chinese citizens consider gold as an alternative or secondary currency.
Chinese Gold Trading Expands with Rising Income and Better Investor Access
The Financial Times reported that the general manager of precious metals at the Industrial and Commercial Bank of China (ICBC), Zheng Zhiguang, stated that the gold demand in China was just beginning. The Times quoted Zhiguang as stating that the precious metal market could be “entering a period of more sustained and steady growth.” Zhiguang credited this increased demand for gold to rising income and better investor access.
In order to satisfy the Chinese demand for gold, an interbank gold market is planned by the Shanghai Gold Exchange. This would include gold ETFs, over-the-counter trading, streamlining the lease market and Friday night trading. The Shanghai and Shenzhen stock exchanges will handle the ETFs.
Zhiguang expressed little doubt that ETF gold products will be offered in China. He expects that the market will start domestically and then expand across the globe. Some gold products will be linked to ETFs, Zhiguang said. However, the new interbank market will start with spot contracts and then expand to forward contracts. The China Foreign Exchange Trading System will invite all banks trading there into the new gold scheme. Eventually, all foreign banks will be invited to trade.
Meanwhile, the Chinese Communist Party Congress met in Beijing and promised a new great leap forward that would include doubling the ordinary citizen’s income by 2020. In addition, China holds only 1.5 percent of its reserves in gold. Some gold bug analysts are suggesting that this paltry reserve position could increase dramatically in the coming years. Both statements bode well for an increased demand for gold by the Middle Kingdom.
Reuters, however, is reporting that gold sales have been flat at the bank, according to Zhiguang. The Chinese are apparently stepping back on buying due to price volatility. The numbers show that ICBC sold 55 tons of gold in 2011, which is up substantially from 2010 when the bank sold 28 tons. GFMS chairman Philip Klapwijk has stated that Chinese demand for gold will grow at only one percent in 2012.
Gold trading investors will need to sift through various statements to determine what exactly are the gold-buying intentions of the Chinese bank and people.