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Could demand from China send gold price soaring?

Analysts are predicting the world’s largest exporter and second biggest economy could hold the key to gold’s future fortunes. In 2010, China became the world’s biggest gold producer, mining 340 tonnes, an increase on its two previous years. 2011 saw another hike, to 361 tonnes. Such growth is in marked contrast to other major gold producers, such as the U.S., which peaked in production around 1997, and Russia, which peaked around 1958. Likewise, Chinese imports of gold, mostly through Hong Kong, tripled between 2010 and 2011.

As a driving force for the commodities bull market for the last decade, it’s predicted China’s current focus on gold could boost prices. The World Gold Council says China’s gold demand has risen 27% a year since 2007, while it’s share of world demand has doubled from 10% to 21%. And yet, analysts remark, evidence of Chinese stamped gold bars is rare. The attitude, reported by Dominic Frisby at is that China is not exporting, but hoarding its gold.

Earlier this month, while speaking at the London Bullion Market Association’s annual precious metals conference in Hong Kong, Xie Duo, Director General of the Financial Markets Department at the People’s Bank of China, said, “the central bank’s policy is to encourage residents to hold physical gold.”

Duo revealed how China set out a ‘Three Transformations Strategy’, in 2004, to turn itself into a major gold player. The strategy was clearly an effective one; Duo said the Shanghai Gold Exchange (SGE) is now the world’s number one spot and physical gold trading centre, while it’s futures exchange is fourth in the world, behind New York, Tokyo and Mumbai. Its Chairman and President Wang Zhe revealed grand plans for the SGE, “As the domestic market matures and opens up, the exchange will launch over-the-counter trading, gold ETFs, Friday night trading and improve the leasing market.”

For many, the turning point in China’s gold fortunes came in earnest with the Three Transformations Strategy in 2004. At that time, the World Official Gold Holdings listed China as 10th globally, with 600 tonnes or a 1.6% share in gold of total foreign reserves. By November 2012, China had jumped to sixth, with 1.054 tonnes or a 1.8% share. The United States tops the chart with 8133.5 tonnes or 76.6% of reserves.

Dominic Frisby at, says the interesting point about China’s position on gold is that, “unlike the countries above it, China’s gold holdings make up such a small part of its foreign exchange reserves. If it were to balance its portfolio up to 10% of its reserves, it would have to quintuple its holdings, assuming no other currency sales. That would mean buying more than Germany’s entire stock. That’s got to be incredibly bullish for the gold price. No wonder they’re buying surreptitiously.”

The impact China’s slow and steady approach to gold will have on the market is yet to be fully felt, but with the weight of one of the world’s most formidable economic powerhouses behind it, the outlook for gold is strong.

Article Last Updated: Wednesday, November 28, 2012