Is China's Love For Gold Making It An Attractive Asset?

Finance minister P Chidambaram's poise to anyhow curtail India's current account deficit has impacted the global demand for gold. Since June-July 2013, when restrictions were imposed by the government on gold import, the Indian gold consumption has come down drastically. Also economic recovery in the west, especially US has downplayed global gold prices, which is considered a safe haven asset. But surprisingly gold started to move up during January-February 2014 and reached USD 1332.10 per ounce on February 18 2014, highest level since October 2013. 

If the world gold council's (WGC) data is to be believed then this up move is a result of China's love for the yellow metal, which has pipped India as the biggest consumer of gold globally. It is very interesting to note that at a time when every other nation is shunning gold as an investment, Chinese people are accumulating it with full vigour. During 2013, China consumed 1066 tons of gold while India's import was capped at 975 tons. 

Fascination of China for the yellow metal can be gauged from the fact that in 2012 it had imported 807 tons and the very next year it witnessed a whooping increase of 32%. As per WGC estimates during 2014, China's gold import is pegged at around 1100 tons while India is slated to consume around 1000 tons. If this continues, then gold as an investment class would certainly conserve its tag as a safe haven asset in 2014. 

Experts are of the opinion that due to the love of the Chinese people for gold, the metal will certainly recover its lost sheen in 2014. "The yellow metal dropped to a six-month low by the end of December 2013, but it rallied to a three-and-half months high earlier this week after reports stated that US economic indicators were disappointing. Interestingly Chinese demand has helped in boosting prices at a time when the Fed's monetary stimulus measures have been driving down the prices," informs Prithviraj Kothari MD, Riddisiddhi Bullions. This certainly looks like a new trend in the gold trade. 

It is also interesting to note that despite curbs on gold import in India, appetite for the metal still remains high as during 2012 India imported 864 tons of gold. Considering this due to illegal channels of import into India, augmented with Chinese demand, gold seems all set to hold its territory this year. The only threat to this equation is the sharp recovery in the US and the west, but it certainly doesn't seem very likely in the short run. "An important factor in the Chinese demand is that though today it accounts for 25% of the global demand, but if we compare it with India, its gold stock is not even half of that of India as till 2002 China didn't allow free import of gold. Considering this, the appetite may continue in the long term also," added Khothari. Certainly China's emergence on the global gold map would be crucial for the movement of yellow metal prices in 2014.