China may overtake India as world's top buyer of bullion

It's taken all of recorded history, but this year China finally looks set to overtake India as the world's No 1 gold consumer.

It may struggle to hold that position in the short term, as the one-off factors that have slowed India's gold demand fade, but in the long term China's rapidly growing economy and investment demand could see it add gold to the long list of commodities where it is the world's largest buyer.

The story this year is mostly about falling demand in India - down by more than half in the first nine months of this year through September, according to the World Gold Council.

Gold's record-breaking run, which has lifted prices 28 percent this year in rupee terms, saw Indians cashing in jewelry and gold bars, while the weakest monsoon in nearly 40 years hurt incomes in the rural sector that is the bedrock of consumer purchases.

In contrast, China's demand was up 8 percent in the same period.

"India has been the world's largest gold consumer since time immemorial. In the Roman era, Indians bartered spices, cotton and jute for gold and precious stones," said Ajay Mitra, Indian subcontinent managing director of the World Gold Council.

"China could be buying gold as they are not sure what the value of their currency would be against the dollar. But gold is not intrinsic to them as it is to Indians," Mitra said.

Metals consulting firm GFMS projects that China's gold demand will total 432 tons this year, and that India's will total 422 tons.

India's purchases

A severe monsoon and record prices were behind the drop in Indian consumption this year, while loose liquidity in China has driven a buying spree across a range of resources.

These factors could easily reverse, allowing India's broad base of jewelry demand to once again offset lagging investment demand.

"China may temporarily surpass India as the world's largest gold consumer, but it's questionable whether that can be sustained," said Xiao Minjie, senior economist at Daiwa Institute of Research in Tokyo.

Minjie said India's growth rate is catching up with that of China, and appears to be entering the early stages of the high-growth era that China saw from 1992 to 1993, giving consumers more purchasing power.

The extent of the fall in purchases could be building pent-up demand that might lead to a big correction, analysts said.

Spot gold has risen by nearly a third this year, touching a record high of $1,226.10 an ounce through Dec 4 as a weak dollar and worries about inflation drive investors towards the traditional store of value.

"This year was an exception. Next year may be better, provided prices are stable and there is no drought again," said Bhargav Vaidya, a bullion analyst in Mumbai.

Dealers and analysts in India also said the drastic fall in demand must not be taken to mean India's appetite for gold fell to the same extent.

A lot of consumers recycled old jewelry to buy new jewelry, the analysts said, while others sold gold bars to profit from high gold prices.

India's total demand may have fallen by only 5 percent to 10 percent, when taking into account the recycled gold, said Nayan Pansare, an analyst who works for jewelry exporters.

When Indians get used to new price levels, their traditional affection for gold might revive consumption, as there is a huge latent demand in India that could explode if prices make a significant correction, said Philip Klapwijk, GFMS's executive chairman.

China's lead

In the long run, China might still overtake India. Economic and social indicators point to its greater affluence and spending capacity.

In the last decade, India's gold imports remained capped under 800 tons despite a rising population and per capita income.

"In the next five to 10 years, definitely, yes, China could overtake India," said a senior gold dealer in an international bank in the Middle East that is looking to start supplying gold to India.

In rural markets, Indians are buying luxury goods such as automobiles and televisions, while the picture is different in rural China, analysts said.

"China is stepping up efforts to extend consumption in rural areas, including the newly wealthy people who are trying to own top brand gold for social status purposes," said Cheng Binghai, chairman of the Shanghai Gold and Jewelry Trade Association.

"Per capita (income) in the rural area is increasing and as the growth rate of gold prices is behind the growth rate of disposable income in China, there is also a very good online shopping market," he added.

Reuters

(China Daily 12/21/2009 page5)