Commodities | Dec 10 2010
By Chris Shaw
In 2009 China was one of the few countries to record growth in gold consumption and this trend has continued through the first three quarters of this year, Barclays Capital noting year-to-date at the end of September total gold demand in the Chinese market was up 24% to 390 tonnes.
While China does not officially report gold trade numbers, Barclays points out some commentary suggests gold imports for the 10 months to the end of October were 209.72 tonnes, well up from the 2009 full year total of 45 tonnes.
As total Chinese gold production over the 10 months to the end of October was 277.02 tonnes, Barclays notes this means China remains reliant on the global market to fully satisfy its gold consumption needs.
Barclays points out over the course of the year there has been a shift in the pace of China buying different forms of gold, as investment demand growth has accelerated while jewellery consumption has been more stable. As evidence, Barclays estimates Chinese jewellery demand rose by 8% in year-on-year terms in the third quarter to 101.3 tonnes, while investment demand was up 68% on the same basis to 45.1 tonnes.
The other point of interest in the Chinese gold market for Barclays is ongoing deregulation. This trend is making it easier for Chinese to invest in gold, an example being approval granted to China's Lion Fund Management for the launch of a gold fund enabling participants to invest money overseas within set quotas.
This trend should continue to boost Chinese investor interest in gold, which suggests some ongoing support for gold prices. This may be needed, as RBS notes while in November both gold and the US dollar were being used as safe haven investments, in the first part of this month gold's role has eased somewhat in comparison.
In RBS's view this implies gold may be losing some favour with investors, meaning more external fuel will be needed for gold prices to continue to gain. If the coming weeks sees any window dressing or there is renewed euro weakness, RBS suggests there could be a correction in gold into the end of the year.
Medium-term, RBS agrees with Barclays that investment in gold remains an attractive option for Chinese investors, especially given Chinese authorities remain concerned about inflationary pressures in the economy. RBS expects investor interest will remain high enough for gold to remain in a trading range of US$1,300-$1,400 per ounce through 2011.
RBS has also updated on silver, noting the physical market for the metal is highly dependent on investment inflows, especially via Exchange Traded Funds (ETFs), to absorb an underlying surplus in the market.
As with gold, RBS points out investors have been attracted to silver as a hedge against any debasement of major international currencies and increasing inflationary pressures in emerging markets given the safe haven status of the metal.
While 2011 should see some investor interest in both gold and silver maintained, RBS sees silver as more vulnerable to a correction from any waning in investor appetite.
This partly reflects silver's volatility, which stems from a relatively smaller market and less liquidity than is the case for gold. As RBS points out, in terms of the value of annual consumption the gold market is about five times the size of the silver market.
Given silver's higher volatility, on a risk/reward basis RBS favours gold exposure in 2011, while expecting silver will underperform both the precious metals group and the base metals sector in the coming year.
