Bloomberg Television’s “On The Move Asia” had a fascinating interview with Albert Cheng, the World Gold Council’s Managing Director, Far East. He discussed China’s gold market and what’s driving the country’s demand with Rishaad Salamat.
Since 2003, we have pointed out how China’s liberalization of its gold market would have enormous ramifications for the global gold market in terms of a huge new source of demand and would ultimately lead to higher prices in the long term.
Bloomberg interviewed GoldCore nearly two years ago in May 2012, about the huge growth in demand in Asia and particularly China, and we commented that this Chinese demand was a ‘paradigm shift’: “We could be witnessing a paradigm shift from China on bullion demand.”
We pointed out “that the gold market was liberalised in China in 2003 and prior to that gold ownership was banned in China by Chairman Mao. The per capita consumption of 1.3 billion Chinese consumers, investors and central bank demand are very significant.” Please click here to listen to the interview on the paradigm shift that is Chinese gold demand.
Albert Cheng reaffirms the paradigm shift for the gold market that is Chinese gold demand. He points out two very important facts hitherto not known by market participants. First is that there are now over 100,000 gold bullion dealers selling coins and bars in China. Secondly, he says this suggests that the majority of banks are now offering gold bullion products over the counter.
The interview is very interesting and is well worth a look.
Gold in U.S. Dollars - 1 Year - (Thomson Reuters)
Albert Cheng: China became the number one [gold] consumption country last year and people are starting to ask, would this be sustained? [The World Gold Council report] shows that in the next four years, [Chinese gold demand] is going to increase by another 25 per cent. And the reason for that is that more and more middle class is coming on stream and people have money to spend.
Rishaad Salamat: But that's just the thing, more and more people are buying gold, but what's caused that change? You can say people have got wealthier but we saw China overtaking India where there's been a traditional demand for gold. That's not something that is traditional in China, is it? So what's driving things?
AC: I think that the key of this is investment demand. Six years ago you didn't see any investment demand in China. China opened up the investment market through banks and now literally any Chinese person can walk into a bank and buy gold products. And you look at the number of outlets where people can buy investment gold, gold bars, gold coins - there are a hundred thousand of them in China. If I make a comparison with America -- Starbucks, McDonald's and Subway together have only fifty thousand outlets. In China there are more than a hundred thousand outlets where you can buy gold. So, the availability of gold in China, in every city, is the main driver behind gold.
AC: Wedding jewellery consumption accounts for 40 per cent of jewellery consumption in China; there is about 300 tons of gold sold in jewellery form.
AC: When people buy 24-carat gold jewellery, which has a markup of less than 10 per cent if it's a popular item, 15 - 20 per cent if it's a more designer item, that is the reason why Chinese people buying gold jewellery in China is equivalent to buying a piece of metal. At the end of the day, this is a way for them to keep their money, to keep their wealth. If they want to sell it, there is always a resale price for this kind of pure gold metal.
So why China has become number one in the world is because if [people] want to save money China, there is not much alternative for them -- you either can buy property of you get into the stock market. But neither of those are very attractive at the moment to the Chinese investor. In the past few years we've seen more and more people buying gold jewellery as well as gold bars.
RS: You've got this forecast in that we've been talking about where there's a 25% gain in gold demand from China over the next four years. What are the risks here to this to the downside?
AC: We all know that China is undergoing a big economic transition from an export-driven economy to a domestic consumption economy. This year is a transitional year. With these changes there will be a lot of major disruptions to the economic life of people here, and again, the shadow banking issue, which the government has addressed, will have an effect on liquidity and it also may impact gold in the short term. Long term, if China gets on to a domestic consumption economy, it will be good for gold jewellery consumption. More and more people will be encouraged to move from rural areas into cities, the urbanisation process will continue and people who are getting rich will get into consumption of gold jewellery or buying gold bars. So short term we will see some headwind but long term, medium term, we see the gold market continue to grow.
The interview can be watched here.
Gold in Euros, YTD 2014 - (Thomson Reuters)