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China Is Gold’s Future

Commodities / Gold and Silver 2010 Apr 05, 2010 - 09:09 AM GMT

By: Frank_Holmes

Commodities

Best Financial Markets Analysis ArticleThe new report “Gold in the Year of the Tiger” from the World Gold Council (WGC) predicts that gold consumption in China could double in the coming decade as a result of rising demand for jewelry, hard-asset investments and industrial uses.

This forecast seems reasonable, and it lines up with what I’ve long been saying about the profound evolution in China’s economy – domestic consumption is replacing exports as the growth engine as more poor Chinese move up into the middle class and from there into the ranks of the wealthy.


Tens of millions of people in China are joining the middle class every year – by some estimates, they already number more than the entire U.S. population and could double in the next decade.

They are buying more spacious and better-outfitted homes. They have made China the world’s largest automobile market, and a wide range of brand-name Western luxury items are available even in provincial cities.

China has a centuries-long cultural affinity for gold, so it makes sense that more middle class and wealthy would mean more gold sales.

The line on the WGC chart above shows how investment demand for gold has rocketed up from next to nothing in 2001 to 80 tonnes (2.6 million troy ounces) last year, with the sharpest upswing coming after trading rules were liberalized in mid-2007. Over the same period, China’s GDP roughly tripled. The Chinese are famous for their high savings rate, and the chart shows how important gold has become as a store of their growing wealth.

The next chart compares China’s annual gold jewelry consumption to more than a dozen other countries. Last year, China consumed 347 tonnes in jewelry, which was about 30 tonnes more than the country’s total gold production (tops in the world). But on a per-capita basis, China is near the bottom of this list.

The World Gold Council points out that, if China matched Saudi Arabia on a per-capita basis, it would consume an additional 4,000 tonnes of gold jewelry each year. That’s more than last year’s demand for the entire world (3,386 tonnes), so even the most enthusiastic gold devotees would probably agree that it’s not a realistic number.

But given projections that the Chinese middle class will double in the next decade as China’s economic growth generates a wider distribution of wealth, it’s not farfetched to think that its gold consumption could also double.

It is farfetched, however, to think that China’s domestic gold output could keep pace with demand growth – more and more of the world’s gold production (on a declining trend for years) would have to be diverted to the Chinese market, and the result could be a significant impact on gold prices in the years to come.

For more insights on China, check out the China section of Frank Holmes’ blog “Frank Talk.”

By Frank Holmes, CEO , U.S. Global Investors

Frank Holmes is CEO and chief investment officer at U.S. Global Investors , a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX) , Gold and Precious Metals Fund (USERX) and Global MegaTrends Fund (MEGAX) .

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

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