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China to Stay World's Largest Purchaser of Physical Gold

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Thursday, 30 Jan 2014 07:33 PM Current | Bio | Archive

Today begins the Lunar New Year. Celebrated mostly in Asian countries that have been influenced by Buddhism, it begins on the darkest day and lasts 15 days until the moon is brightest. Each year of a 12-year cycle celebrates a different animal juxtaposed with characteristics from a five-year cycle of elements. This is the year of the wooden horse.

People born this year are said to have the characteristics of a horse: active, energetic, and social. The wood element supposedly brings growth and vitality, but also potential volatility if caught fire. Chinese astrologists are predicting a year of growth punctuated by volatility with financial success to those who have the endurance to keep up.

I don’t know if any of that is true but I am certain of one thing: China will maintain its title as the world’s largest purchaser of physical gold this year.

China has galloped past India to become the biggest gold market in the world since India severely restricted gold imports in the latter half of 2013.

While these restrictions have helped cut the trade imbalance that threatened the value of the rupee, the resulting flood of gold smuggling has not satisfied domestic demand. Smuggled gold also denies the Indian government of control and income.

So while the policy is having it intended impact, it has caused unintended consequences.

Therefore it is also unclear how long the restrictions will remain in place.

Meanwhile, China’s runaway demand for gold among individuals is up. Many in the rapidly growing middle class want to reallocate their wealth into gold because of their cultural belief that gold is a time-proven way to store value.

Gold demand should remain strong during their apparent economic slowdown. Instead of paring down their gold purchases, expect many Chinese to diversify from the weakening yuan into gold.

The Lunar New Year is also an auspicious time to buy gold and give gold as gifts.

Finally, gold’s relatively low prices and the symbolism of the color of gold in Chinese culture have also contributed to robust sales ahead of the Lunar New Year.

Even China’s central bank, the People’s Bank of China (PBOC), has gotten in on the action. The PBOC last announced its official gold holdings at 1,054 tons in 2009. Some have speculated that the PBOC’s gold reserves may have more than doubled to 2,710 tons.

If true, China’s ranking would rise to number four in the world, behind the United States and Germany and the IMF, and ahead of Italy and France.

Some analysts forecast that China’s individual investors cannot keep up the 1,000-ton a year pace of gold purchases and that gold buying will slow if the Chinese economy slows.

Do not bet on it.

Even if the Chinese market softens, expect China to buy a lot of physical gold this year.

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Ed-Moy
Some analysts forecast that China’s individual investors cannot keep up the 1,000-ton a year pace of gold purchases and that gold buying will slow if the Chinese economy slows.
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2014-33-30
Thursday, 30 Jan 2014 07:33 PM
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