old demand in China, India to glitter
India's pent-up hunger for the yellow metal continues unabated with a growth in the economy. The same holds true for China.
Author: Shivom Seth
Posted: Thursday , 20 Jan 2011
mineweb.com
MUMBAI -
With the Chinese economy galloping at a rate of 10.3% growth last year, there is no slowing down in China, already the largest bullion miner. But as the economy grows, so does inflation. Given that gold is a traditional hedge against inflation, Chinese consumers have been rushing to buy gold coins and bars.
China's middle class is also growing which is further boosting gold purchases. According to reports, China's middle class is set to hit 600 million people by 2015 and 700 million people by 2020 - more than twice the entire population of the United States!
India, too, is adding about 40 million people to its middle class every year. Its economy is growing and so is inflation in the country. Is the same story being played out in the two neighbours?
China
The country imported more than 209 tonne of gold during the first 10 months of 2010; a five-fold increase from an estimate of 45 tonne of the previous year.
This clearly opened the floodgates and ensured a clean path for Beijing to overtake India as the world's largest consumer of gold.
Statistics revealed that growth in the Chinese economy has further picked up in the fourth quarter of 2010, to 9.8% from 9.6% in July to September. Chairman of the Shanghai Gold Exchange, Shen Xiangrong, told mediapersons that uncertainties about the Chinese and global economies the last year and inflationary expectations had ``made gold, as a hedging tool, very popular''.
Clearly, the world's second largest economy has had huge sums of money pumped into the economy by state-run banks. Curbing inflation is a top priority, with the Chinese authorities hiking interest rates twice in the past four months.
India
The Indian economy is not far behind, with growth pegged at 9%. And, as the economy grows, consumers continue to push demand for the yellow metal. What aids the process is rising income and a high savings rate, especially among the Indian population living in the big cities.
India is battling inflation too. On Thursday, official data released by the Indian government showed that India's food inflation rate declined further to 15.52% for the week ended January 8, 2011, from 16.91% in the previous week.
The statement, quoting provisional data, showed that the easing of the food inflation rate comes at a time when the Indian government is grappling with high food prices.
``In India, like many other Asian markets, people tend to have a high savings rate and a part of this saving goes to gold. Compare this with the United States, where about 43%-47% of household savings go to the stock markets,'' said Mahesh Shankaracharya, bullion and precious metal analyst at a foreign hedge fund in Mumbai.
Noting that gold is viewed as a safe haven amidst high inflation, he went on to say that the high savings rate in India has been a matter of much speculation for bullion analysts and investors.
``There are three major factors that will continue to drive increased consumption of gold with the Indian populace,'' said Shivaraya Nadkarni, who works with a foreign institutional investor (FII) here.
FII's have been tracking the growth pattern in the Indian economy which gives an interesting reading about the consumption pattern and the desire for gold amongst Indians.
``India has rising income levels, which are bound to account for over 80% of total growth over the next two decades. Then, there is population growth, which will account for a further 16% rise in consumption. The third factor will be the growth in savings,'' said Nadkarni.
India's household savings rate is expected to peak in 2025, as India's demographics become more youthful. However, even if household savings were to remain flat, and all the growth projections go wrong, consumption of gold in India is set to grow substantially, said Nadkarni.
He adds that India is poised for a dramatic expansion of domestic consumption in precious metals, that will ensure that the country remains one of the largest gold markets in the world.
Interestingly, though a sizeable chunk of the Indian population continues to live below the poverty line, when it comes to buying gold, there is no holding back. Bombay Bullion Association statistics showed that Indians spent around $ 6.9 billion buying gold in the first three months (between January to March) of 2010.
Though the Association is still in the midst of tabulating data for the remaining period, the amount is nearly ten times the $ 708 million that Indians spent to accumulate gold in the same period of 2009.
In the first three months of 2010 - ten times higher purchase of gold as compared to 2009. What will it be in the first three months of 2011?
Asian Tigers
The World Gold Council (WGC) has reported that for the third quarter of 2010, global gold demand rose 12% year-on-year to 922 tonne. All of it was brought about primarily by strong jewellery demand in India and China, where the high gold price seems to have been all but discounted by consumers.
WGC also reported an increase in central bank activity purchasing 22 tonnes, acting as net buyers in the Indian market for the sixth consecutive quarter.
``But one should not forget - China's saving rate is also high, by historical experience and international standards. What really sets China apart from the rest of the world is that structural factors point to a peaking in the Chinese saving rate in the medium term and enhanced policy measures, promoting job creation,'' said Nadkarni.
Moreover, last year, the Chinese government went so far as to advise the people of China to buy gold. Television programmes were produced, explaining the benefits and logistics of investing in the yellow metal.
What and where is the payoff? |
