WGC expects Chinese gold demand to rise by 10% in 2011

Chinese gold demand will probably rise by another 10% this year, the World Gold Council (WGC) said on Monday. Chinese people are buying precious metals in order to protect their savings and wealth against inflation. Many are also growing increasingly concerned by the potential for a collapse in the country’s property and stock markets. Many financial analysts are convinced that Chinese housing and stocks markets are huge bubbles waiting to pop, an event that could have serious ramifications for the country’s banks.

Aside from their inflation concerns, China's investors are also buying gold to hedge against a serious deflationary event. Chinese gold demand totaled 706 tonnes last year. Albert Cheng, director for the region Far East at the WGC, told Reuters in an interview that both China's domestic gold investments as well as its jewellery demand could easily surpass last year's total gold demand by 10%, or around 70 tonnes, this year.

Even record-high gold prices have not changed this trend. Local mining companies have struggled to feed the country´s growing demand. China is the world´s largest gold producer and produced 351 tonnes of the yellow metal last year. Gold imports reached 240 tonnes. According to Cheng, Chinese gold demand has significantly increased in the first half of 2011, causing imports to rise further. This factor will likely have a supportive effect on global gold prices. In the meantime, India´s new festival season is upon us, which will be kicked-off in October by the Diwali festival of lights. Diwali is followed by the country´s wedding season. Many of India's gold and jewellery dealers have replenished their stocks in recent months, since they expect one of the best sales years in the country´s history. Indians traditionally like to give gold and silver as gifts to friends and family members during festival season. China and India currently account for around 52% of global gold consumption.

Among those counting on such demand is famous hedge fund manager John Paulson. His earnings were rescued by his gold investments in the second quarter, with the recent turmoil in equity and credit markets meaning that two of his largest funds plummeted 23% and 33%, respectively. Paulson´s investments in the gold sector offset heavy losses on bank investments. Paulson has held 31.5 million shares of the SPDR Gold Trust, which he has accumulated since 2009. Despite heavy losses from investments in US financial institutions like Bank of America, Paulson expects an increase in the US growth rate in the coming two years and an improvement in the country´s economy.