Demand Trends that A Gold Traders Need to Keep in Mind

In its first quarter report on gold demand trends, the World Gold Council estimated demand for gold at 981.3 tons. This totals to $43.7 billion in value. Much of the year-on-year increase was a result of the growth in investment demand. Demand for bars of gold and gold coins were up 52%, totaling 366.4 tons. In the first quarter of 2010, this demand stood at $8.6 billion, whereas in the same period in 2011, it surged nearly 100% to $16.3 billion.

Gold traders have been highly active during the first quarter. Investment demand for gold bars and coins was due to a slight dip in prices in the month of January, high inflation in a lot of countries and unrest in northern Africa and the Middle East. Analysts at the World Gold Council believe that the conditions are such that the investment demand will continue to grow due to these factors. The growth in demand was also led by the demand for gold jewelry from India and China. The two Asian nations accounted for 63% of the Q1 demand for gold jewelry.

Trends in China: Significant for Gold Traders Across the Globe

The global demand trends of the first quarter of 2011 showed that China has emerged as the largest market for gold. Gold traders should keep track of the Chinese market demand. Since the deregulation of the market in 2001, the Chinese demand for gold has increased at the rate of 14% per annum. Jewelry accounts for 64% of the demand, followed by investment at 27% and technology at 9%. In fact, the demand for jewelry has doubled in the last seven years, going from 224.1 tons in 2004 to 451.8 tons in 2010.

The 1Q11 report published by the World Gold Council says, “In a period of on going global financial and economic uncertainty, the role of gold as a monetary asset, risk diversifier and global currency has made it an attractive international asset for domestic investors.” The analysts cited four key factors that would likely boost the growth of Chinese gold demand:

  • Role of gold in Chinese culture: Gold has been an important part of the Chinese culture and heritage. It has always been associated with good luck. Chinese people with a high status in society wear more gold jewelry and gold is the gift of choice at important functions, since it is considered very valuable. Gold is an important part of Chinese wedding jewelry, and it is traditional to gift gold at the birth of a child, on Chinese New Year and on birthdays.
  • Fear of inflation in emerging markets: Fuelled by excessive liquidity in the international system, there has been a rush of capital inflows in China. The inflows of capital have contributed to inflation, which has caused Chinese investors to shift to gold. Gold has been seen as a good option to preserve wealth and as a good hedge against inflation.
  • Positive attitude of China’s central bank towards gold: In a report titled 2010 International Financial Market Report, the People’s Bank of China has shown a positive view on gold. The PBOC has suggested in this report that investment demand for gold has been supported by an expectation of high inflation and the recent prolonged political instability in the Middle East North Africa (MENA) region. The PBOC, despite being the sixth largest official holder of gold in China, has a low percentage of the total reserves by international standards.
  • Limited domestic investment channels: The impact of the global recession has been moderated in China by continued economic expansion. However, this expansion resulted in an overheating of real estate prices causing a concern over the performance of the domestic stock markets. The Chinese government issued a series of regulations to curb real estate prices. This has pushed a large amount of capital into other areas. As a result, investors are turning to gold as a way to diversify their savings and investments.