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China's Largest Gold Bank Expects Rising Demand

Release Date: 
Monday, June 11, 2012

Gold prices were volatile in Monday morning trading, moving from the upside to lower prices on news that Spain secured emergency funds to support its ailing banking sector. Gold was $9.10 lower at 7:21 a.m. Pacific Time on the New York Spot market, trading at $1,586.60 per ounce. Spot silver was $0.13 lower at the same time, trading at $28.50 per ounce. (Click here for the most current spot prices.)

The euro surged on the news that European ministers agreed to a $125 billion loan package to aid Spain's banks. Investors still remained cautious on the Eurozone ahead of elections in Greece.

China's largest bullion bank said that Chinese gold investment demand may rise more than 10 percent this year as buyers seek havens from Europe's debt crisis and weaker currencies. "Investors here want to hold part of their assets in gold to hedge for the risks, especially now that the financial crisis has evolved into a sovereign crisis," according to Zheng Zhiguang, general manager of the precious-metals department at Industrial and Commercial Bank of China Ltd. (ICBC). ICBC represents more than 20 percent of the turnover on the Shanghai Gold Exchange, China's largest market for precious metals, and about 16 percent of nationwide bullion sales last year.

"It's necessary for individual, institutional or even government investors to hold gold when the value of money is decreasing at a time of possible quantitative easing or excessive money-printing practices," said Zheng. While a stronger dollar may pressure bullion, "I'm optimistic on the gold prices in the long term because of the China demand," he added. "There are too many uncertainties now in the global economy, politics and the financial sector."

Investment demand in China rose 13 percent in the first quarter of 2012 versus the same period one year earlier, according to the World Gold Council. Gold demand climbed 38 percent in 2011 versus 2010. As China allowed investors to buy and hold gold only in recent years, "there's explosive, pent-up demand because the Chinese have an attachment to gold," said Zheng, predicting that growth in investment demand will beat the expansion in jewelry sales. "There's great potential for expanding China's physical-gold investment market."

Macquarie research noted that China ranks as the world's biggest consumer of gold, nearly tripling in annual gold consumption in the five years through 2011. "Given jewelry consumption per capita in China is only 7%-8% that of the U.S., and strong investment demand, we remain positive on China gold demand, which indirectly supports strong gold prices," Macquarie said. The firm also noted that potential gold buying by China's central bank was another positive factor for long term demand.

Jeffrey Kleintop, LPL Financial chief market strategist, sees an opportunity in gold given an expected pickup in economic growth in China. After recent rate cuts, "China's moves here have been relatively effective at slowing the pace of decline [in growth]....they're crude policy tools but they've been remarkably effective. It looks to us that China's bottoming out here. We may actually begin to see renewed growth later this year, but given that backdrop and everything else we said, it probably makes sense to buy gold and oil rather than stocks. Those are two things that China's going to be consuming. And they've actually had more of a pullback than stocks and may present interesting opportunities."

(Source: "Why It Makes Sense to Buy Gold & Oil Now," CNBC, June 11, 2012; "Gold-Investment Demand In China To Advance 10%, Icbc Says," Bloomberg, June 11, 2012; "PRECIOUS-Gold steady on Spain news; platinum, palladium rally," Reuters, June 11, 2012; "China gold sector 'attractive': Macquarie," MarketWatch, June 11, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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