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Gold Prices are now critically linked to China and its booming middle class...
CHINA IS KEY when it comes to the shape of gold demand according to Eily Ong, author of the World Gold Council's recent study, Gold in the Year of the Tiger, writes Lara Crigger at Hard Assets Investor.
China's growing middle class with disposable income and a penchant for saving, says Ong, could drive gold consumption in the country to double over the next decade – which should help boost Gold Prices.
Ong has been with the World Gold Council since November 2009. Previously, she was a metals and mining equities analyst for Credit Suisse, in London. Currently, she is an investment research manager for WGC, where her role is to research and promote the use of gold as a long-term portfolio asset.
Recently we sat down with Ong to learn more about the supply and demand factors underpinning Chinese gold consumption, including why jewelry plays such a big role, how China could affect gold's price seasonality, and whether the current growth is sustainable.
Crigger: We've seen incredible growth in Chinese gold demand over the past few years. What's driving the push?
Ong: Chinese gold consumption has been driven mainly by several factors: the rising average income per head; a surplus of investable income, given the high savings rate amongst the Chinese people; the underlying strength of the Chinese gold culture; and the improving standards of living in China itself.
In recent years, we have seen demand across all sectors grow for the expanding Chinese middle class, especially in the 18-karat jewelry market and the industrial sector (particularly for mobile phones). However, our report and our outlook are based on the Chinese population as a whole, not just the middle class.
Crigger: What about the investment side? Are we seeing growth among the Chinese middle class there?
Ong: We do see strong evidence from both the jewelry and investment side; they are expected to be the chief drivers of Chinese gold demand going forward.
By far, jewelry is the most dominant area of gold demand in China; it absorbs almost 80 percent of all gold usage! We found that if gold was consumed in China at the same per capita rate as it was in India, Hong Kong or Saudi Arabia, then the annual Chinese demand could increase by at least 100 tonnes, to as much as 4,000 tonnes, in the jewelry sector alone.
But in terms of investment demand, this sector has been growing in line with the country's GDP and population. The IMF and World Bank have forecast Chinese GDP to grow by 10 percent and 9.5 percent, respectively, in 2010. So we'll also see that investment demand grow. The Chinese are high savers, and the World Gold Council expects consumers to look at gold as an asset class as they continue to build (or, in some cases, rebuild) wealth, while minimizing the variability of their returns.
Crigger: Would such a high growth be sustainable over the long term?
Ong: Gold demand has grown in China at an average rate of 13 percent per annum. During the past decade, the Chinese gold mining producers stepped up production by 84 percent. So Chinese demand growth has continued to outpace domestic production capacity, and we've seen this since 1992.
But China is still ranked No. 2 behind India in terms of demand. And although we see the acceleration in the demand growth, the country still has one of the lowest gold consumption intensity rates, if you compare it to Western economies, or even countries with similar gold cultures, like Taiwan or South Korea.
Crigger: Why is that?
Ong: Well, we had this deregulation in the Chinese gold market; I think people aren't really aware that the regulations were only lifted less than a decade ago. So, yes, we've seen the per capita consumption level growing: From 2002, the per capita consumption was at 0.17 grams, and this has almost doubled to 0.33 grams in 2009. But it's still one of the lowest in the world. So they are catching up in terms of their Western counterparts.
Crigger: Won't this growing consumption eventually put the squeeze on global gold supply?
Ong: We did some analysis in the report on recently published '09 figures from the United States Geological Survey; they estimate that China's known gold reserves account for just 4 percent of the total global gold reserves. That's really small. So our estimates suggest that China may exhaust its known gold reserves in just six years from now. And it could be less, if the Chinese demand continues to accelerate.
So if our suggested analysis comes to fruition, then it seems that indubitably, there would be some implication for the gold market, as China is the world's largest gold producer since 2007.
Chinese companies have already started acquiring gold mining production and businesses outside China, as the country tries to secure sources of gold supply to meet its growing domestic demand. We do see that domestic supply growth could be challenging structurally in China, unless there's more funding directed toward exploration. Chinese gold mining resources are still relatively undiscovered, and we believe this could create new investment opportunity.
Crigger: As China continues to increase in importance in the gold market, do you think we'll start to see gold's seasonality follow the Chinese calendar more closely? Will we see a bigger bump from the Chinese New Year, for example?
Ong: There are many factors driving commodity prices, of course, and seasonality is just one of them. If you look at it in terms of Dollars, we showed in the report that January, September and November have been the strongest months for gold in the past five-10 years.
In terms of Chinese holiday seasons, we do typically see investors restock during the Chinese New Year, Christmas and the world New Year. Yes, they do have a positive impact on the world Gold Prices, historically. But there's no perfect rule of thumb to seasonality, in terms of forecasting.
India is still a key gold market; it has been the world's largest gold market, in terms of volume. Certainly, China's outlook will have implications for the gold global market, but in many respects, China shares a similar gold culture or heritage to India. So in long terms, we do see both India and China to be very important gold markets, regardless of which is going to be the main driver.
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