Gold is one of the most recognized symbols of wealth in the world. Even in the electronic based and credit backed financial systems of today, gold still holds its traditional value as a medium of exchange and value. And despite the recent downturn in the price of gold amid inflation pressures in China and slowing growth in emerging economies, there is evidence that growing demand for gold in China and other emerging economies can allow for a strong rally in gold prices in the near future.
Historically, gold has outperformed the market in periods of economic uncertainty, as investors divert money away from equities and into safer instruments such as gold. This is especially crucial as the demand for physical gold to hold and preserve value is increasing in Europe as economic uncertainty continues to loom.
However, it is China where one of the fastest growing markets for growth is. There is a tremendous amount of demand for physical gold in China. The price of a commodity is determined primarily by the interaction of supply and demand of that commodity. In the case of gold, demand is increasing due to European as well as Chinese demand. While supply is increasing substantially as well, a lot of the gold that is in the market is being taken out of circulation because the new customers of gold in China buy the gold to hold it, effectively taking it out of the global supply. This is done through three major routes: the Shanghai Metals Exchange, gold imports to Hong Kong, and the major jewelry stores in China. This means that there is strong indication of growing demand amid decreasing supply, which can even further increase the demand for gold.
Another factor supporting the rising demand for gold is the fact that the gold prices in recent years have been relatively high. The drop in gold prices has allowed investors and consumers that have wanted to buy gold but don’t want to buy at historic highs to enter the marketplace. Since price is such an important determinant for products such as gold, the lowering of the price can cause a proportional increase in demand, particularly in the Chinese market, where gold is seen as more than a commodity.
The intrinsic and economic value of gold is enhanced by its cultural properties as well as its unique place as a symbol of social and economic status. This is particularly important for the emerging class of wealthy elites in China, as well as the absence of other investment vehicles. The Chinese government has been trying to crack down in real estate investment to cool inflation in all major cities, which makes gold an attractive substitute. In addition, gold has strong and predictable cyclical demand following traditional Chinese holidays, since it is usually used as gifts during such celebrations and exchanged between families.
While the price of gold has fallen in recent times, it is clear that demand for gold has remained strong. This can be seen from gold’s property as a hedge against economic uncertainty, drawing demand from Europe, as well as the cultural properties and social status properties of gold that draws strong demand from the massive Chinese market.