China becomes world's largest gold consumer

China overtook India last year as the world's biggest consumer of the yellow metal as retail investors bought unwanted gold from global institutional investors.

Chinese consumers became the world's largest purchasers of gold last year, overtaking India as they snapped up the yellow metal being sold off in droves by global institutional investors.

Mainland Chinese demand for gold bars, coins and jewellery rose 32% in 2013, hitting a record level of 1,066 tonnes. Indian demand meanwhile increased 13% year-over-year to 975 tonnes, according to the latest World Gold Council Gold Demand Trends report released Tuesday.

The retail consumer gold rush – which led to 3,863 tonnes of gold bar, coin and jewellery purchases globally in 2013 – contrasted with outflows of 881 tonnes from gold exchange-traded funds. The net result was a 15% decline in gold demand compared with 2012.

ETF outflows were a direct result of Western institutional and official-sector investors – including governments, central banks, pension funds and hedge funds – liquidating their gold positions as prices fell and US equity markets rallied.

Gold prices dropped 28% last year, incentivising Chinese consumers to swoop in and buy at cheaper prices, the World Gold Council report noted.

“They left and in a big way,” Albert Cheng, managing director for the Far East at the World Gold Council told FinanceAsia, referring to the institutions. “There were 881 tonnes of gold redeemed in the ETF market. But what has come out has moved to Asia and is now in the hands of the Chinese consumer. And what I mean by consumer is the people in the street buying gold directly, and also in physical form, such as jewellery, bars and coins.”

Chinese investment into gold bars and coins rose 38% to 397 tonnes last year, while Indian investment in bars and coins increased by 16% to 362 tonnes.

Global investment in gold bars and coins totaled 1,654 tonnes last year, a 28% rise from 1,289 tonnes in 2012, and the highest amount since the World Gold Council began tracking the data in 1992.

The Chinese purchased 669 tonnes of jewellery last year, a 29% increase over the 519 tonnes the year before. Indian consumers meanwhile bought 613 tonnes worth of gold jewellery last year, an 11% increase from 522 tonnes in 2012.

Globally, jewellery purchases totaled 2,209 tonnes, the highest figure since the financial crisis in 2008, the report read.

While China and India will remain important consumers of gold in the physical metal – combined they account for 60% of total global consumption – there are early signs that other large consumers will make more gold jewellery purchases in 2014.

US gold jewellery imports are on the rise, an indication that US consumer demand is increasing, Cheng said. “Although the recovery in the US is still [at an] early stage, it appears [that] it has now spread to the US consumer. They are spending more on cars [and] housing prices are picking up slightly.” And likewise for jewellery, he said, noting how US consumers spent 21% more on gold jewellery in the fourth quarter compared with the same quarter of 2012.

Enter Japan as China growth levels off? 

Uncertainty in equity and real estate markets could lead Asian consumers to continue investing in physical gold this year, although Cheng cautions that it won’t be at the same levels as seen last year.

“The price pullback and the change in global financial markets led to [significant] Chinese investment in gold last year but 30% [growth] is not sustainable,” Cheng said.

He also does not expect Chinese institutional investors to begin allocating more funds to gold any time soon, noting how Asian institutions currently are predominantly looking at equities, bonds and alternative investments.  

“It has not been a policy [for Asian institutions] to get into gold in a big way. What has been driving the gold market in Asia is the consumer sentiment,” he said. “At the moment it’s still very retail-driven.”

That said, Japanese pension funds have started to eye the asset class and these pensions represent a phenomenal amount of money – the country’s Government Pension Investment Fund is the second- largest pension fund in the world, with $1.4 trillion in assets under management as of September 2012, according to FinanceAsia's sister publication AsianInvestor.

For the moment, Japanese pensions remain mainly invested in bonds, although sentiment may be shifting as Abenomics – Prime Minister Shinzo Abe’s three-pronged approach to revitalise the economy – attempts to encourage greater investment in local stock markets.

Gold would fit nicely in most pension funds’ portfolios, Cheng said, noting that the World Gold Council’s office in Tokyo is in the process of talking with the pension funds about the merits of investing in the yellow metal. “We’re still in the educational process.”

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