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China Gold-Demand to Double This Decade – WGC

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Today, the World Gold Council issued a report predicting that Chinese gold-demand would double over the next ten years. There is nothing particularly surprising in this news. Indeed, I consider this an extremely conservative prediction. I would expect China's gold-demand to double in no more than half that amount of time.

Consider this: we have the world's largest population (20% of the entire world), with rapidly rising incomes. In contrast, North America and Europe, whose own development-spurt drove the world economy for 50 years following World War II, comprise only about 10% of the world's population – half the size of the Chinese bloc.

Consider this: China has a strong, cultural attachment to precious metals (like all high-savings societies) – yet for nearly 50 years most of China's citizens have been shut-out of the gold market, as the government didn't allow the sale of gold in small quantities. That policy was only ended little more than a year ago, so these 1.2 billion people have five decades of gold-buying to catch up on, and not only do the Chinese people have rapidly rising incomes, but with their 30% savings rate, they have a massive hoard of wealth with which to indulge their appetites for gold (and silver).

While the World Gold Council report was much more restrained in its analysis, it did produce some useful numbers to quantify “the China equation”. Combined retail investment and jewelry demand totaled 423 tons in 2009, while China's domestic supply (as the world's largest gold-producer) amounted to only 314 tons. That greater than 100-ton gap can only be filled through importing gold. In fact, gold imports to China are likely at least triple that amount – since it is common knowledge that the government of China is buying most of its domestic production.

We know this because China was able to increase its gold reserves by (at least) 76% since 2003, but without purchasing gold on the open market – which must be reported in a timely manner, like all international currency transactions.

Thus, not only is China already importing hundreds of tons of gold per year, but this is all new demand (for the reasons previously mentioned). This means we have a new source of demand which is not only “consuming” all the tons of the world's largest producer, but hundreds of additional tons per year – at a time when gold production in most of the rest of the world is steadily falling.

However, what is occurring today is nothing but a “trickle”, compared to where Chinese demand could end-up at. The WGC stated that if China's per capita consumption can match the consumption patterns of other gold-hungry populations – such as Saudi Arabia, India, and (those other Chinese) Hong Kong – then the WGC estimated that the nation's demand could rise “to as much as 4,000 tons”.

The WGC also reported another interesting detail which completely surprised me. Since 2002, despite China's gold-buying binge, that gold (as a share of total currency “reserves) fell from 2.2% in Q4 of 2002 to only 1.6% of reserves today – as China's booming economy has caused its overall currency reserves to increase at even a faster rate than its gold stockpile. This clearly suggests that the only possible direction for demand from China's government is up.

And speaking of “government demand”, as mentioned in a recent commentary, the world's central banks have turned from large, net sellers of gold to large net buyers of gold in one year. This was the first time this has happened in 30 years, and the largest wave of gold-buying by central banks in nearly 50 years (going back to when the world was still on a “gold standard”).

Thus, we have the world's two largest sources of demand essentially both being new sources of demand. This means that the question which investors should be asking themselves is not “will gold prices go higher?” The question which investors should be asking themselves is “how long can I buy gold at current give-away prices?” given these huge, new sources of demand and no more net-supply coming onto the market from central banks, who (for most of the last decade) were dumping at least 500 tons per year onto markets.

Keep these numbers in your mind the next time you hear the silly propaganda from the anti-gold cabal that the IMF's 200 tons of gold yet to be sold (and only a one-time event) will “depress the market”. Jon Nadler of Kitco is the leading voice in that regard – proving either that Nadler can't count, or that he is a loyal foot-soldier of the cabal.

The fact is that if most of the market-sheep hadn't been duped by an explosion of anti-gold propaganda this year (the most I can ever recall seeing), it's likely that gold would already be bouncing around the $1500/oz mark – rather than still loitering at $1100/oz.

We live in a world with a rapidly rising population, and a far more rapidly rising mountain of paper which the world's bankers erroneously call “money”. While the mountain of paper available to buy gold is increasing by double-digits every year, gold production has been registering only a pitiful 2% annual increase for almost the entire last decade.

With the paper to buy gold growing more than five times as fast as the supply of gold, and with new sources of demand showing up on an almost daily basis, you don't have to have studied “supply and demand” in economics to know that there is not nearly enough gold to go around.

Buy it now at $1100/oz, or chase it later at $1500, $2000, $2500...Just to remind readers one more time: Shadowstats' John Williams has recently calculated what the inflation-adjusted price of gold would have to rise to – just to equal the 1980-high: $7494/oz.

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