How China Makes Investing In Gold A Winning Move

Gold prices yesterday touched over $1,346 an ounce – continuing this week’s rise to the highest level in three weeks.

This move came despite news that larger investors are no longer investing in gold as much as earlier this year.

Billionaire investor George Soros sold his entire position in the SPDR Gold Trust (GLD) in the second quarter of 2013. Another billionaire investor, John Paulson, reduced his holdings in GLD by 53% in Q2.

And speculators in gold ETFs have sold roughly 650 metric tons of gold so far this year.

These moves didn’t faze analysts familiar with the gold market – and didn’t change their bullish outlook on gold prices.

Marcus Grubb, managing director of investment at the World Gold Council (WGC), told CNBC:

”We feel that speculative money (ETF trading) has largely come out of the gold market. We feel that gold is nearer the bottom than the top right now. You’ll see a stronger market towards the end of the year, and into next year.”

So who is left investing in gold?

Look to the East…

China, India, and the Case for Investing in Gold
The World Gold Council revealed that the gold was absorbed by China’s 85% rise in total gold demand in the second quarter of 2013, along with India’s 71% rise in total demand.

Grubb said, “The gold that has come out of (ETFs) has gone into strong hands, because it’s obviously gone East into mainly jewelry, bar and coin demand in India and China. A huge amount of demand coming from India and China has underpinned the market at this level.”

He highlighted to CNBC one area for his optimism on investing in gold in the months ahead – he said China’s move toward a more consumer-driven economy will drive demand for physical gold in the country even higher.

The World Gold Council currently forecasts that Chinese gold demand will hit 1,000 metric tons this year. It says growth is coming from both investment demand and jewelry demand.

The increased demand is evidenced by the physical deliveries of gold from the Shanghai Gold Exchange, which in the first half of 2013 exceeded all of last year’s.

Numbers from the China Gold Association (CGA) are equally impressive…

It reported that demand in China for the precious metal hit a record 385.5 metric tons in the second quarter of 2013. That is double last year’s second quarter total, according to The Wall Street Journal.

The CGA also said Chinese gold consumption in the first half of this year jumped by 53.7% to 706.38 metric tons. Consumption for all of 2012 was 832.18 metric tons. So China already hit 85% of that level and is well on its way to blasting through that number by a substantial margin.

A closer look at the numbers show that China’s gold bullion consumption rose 86.5% year-on-year to 278.81 metric tons and gold jewelry consumption climbed 43.6% year-on-year to 383.86 metric tons.

The strong buying from China has put a floor under gold prices.

Joyce Liu, an analyst with Phillip Futures in Singapore, told The Journal, ”Without strong Chinese physical demand, gold prices would likely be trading at a much lower price now.”

China’s Consumers and Gold
So why is the average citizen so anxious to be investing in gold that they buy on any dip?

Part of the answer is cultural, but part of the answer is simple economics…

People in China – similar to other Asian countries – have an affinity for saving. China has one of the highest savings rates in the world.

Combine this with few viable savings alternatives and you have booming investment demand for gold.

Readers may wonder why most Chinese don’t just put their savings into Chinese banks.

The answer is that the central bank, the People’s Bank of China (PBOC), is following the Fed’s lead with very low interest rates. In fact, real interest rates in China are negative – inflation is higher than the rate paid on savings accounts by banks.

So there is little reason to park money in banks. Letting it flow into gold is just about the only way to preserve consumers’ buying power.

The correlation between gold prices and inflation in China was pointed out in an article from Gold Republic, which I spotted on Zero Hedge.

The article stated that in the past 20 years, the correlation between the gold price and Chinese consumer price inflation was 0.80. But in the last 10 years, the correlation was an astounding 0.97, not far from a perfect 1.00 correlation.

Perhaps gold market participants should quit worrying so much on what the Fed’s next move will be and focus more on what the PBOC plans to do with setting interest rates.