In 2007 China surpassed the USA to become the second biggest retail gold market in the world after India. Total consumer demand in China's mainland, Hong Kong and Taiwan reached 363.3 tons, an increase of 23.5 percent from 2006, the World Gold Council indicated in a research report.
To put that figure into perspective 363.3 tons, is equal to 10,596,250 troy ounces of gold, at today's gold price of approximately $900 US that is $9,536,625,000 US Dollars worth of gold.
Mainland China gold demand, including gold jewelry and retail gold investment, reached 326 tons, an increase of 26 percent from 2006. This is the first time it has surpassed the 300 ton level. The gold jewelry demand in mainland China reached 302 tons in 2007, a year on year growth of 23.5 percent. Gold Jewelry and other ornaments have always been a form of savings in China since time immemorial.
India which has the world's largest gold demand had a gold demand of 773.6 tons in 2007, while the US now in third place had a gold demand of 278.1 tons.
"Encouraging civilian reserves of gold has strategic significance and economic value," said a director of the Peoples Bank of China's (China's Central Bank) official news vehicle back in 1998 when gold was around $300US. Can you imagine the US Federal Reserve Bank giving such a recommendation and what it would do to the gold price?
The article went on to say "If there are problems with the U.S. dollar, there will be an international catastrophe." "Reducing reliance on the dollar, and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk," it said. "As a result, an increase in our country's gold reserves is necessary."
It looks like the Chinese people have been taking notice of the advice from their central bank to buy gold. China's mainland gold demand rose 18% percent from 2006 level to 94.3 tons during the 4th quarter. This was when the gold price rocketed from the breakout area of of around $730US to around $900US.
Consider this, the U.S. possesses 262 million ounces of gold for its nearly equal population. Were China to achieve the same financial gold backing, it would require 1.2 billion ounces of gold. The same amount of ounces of gold owned by all the world's central banks and more than ten years of global gold mining production. However, China is now the worlds largest gold producer, surpassing South Africa in 2007.
According to the Peoples Bank of China, China’s foreign exchange reserves as of the end of 2007 were $1.53 trillion. If their central bank were to have 10% of these reserves ($153 billion) in gold they would need 168.3 million ounces of gold at the current gold price. The Chinese central bank currently has 19.29 million ounces of gold leaving them 149 million ounces of gold short. China could buy all of the IMF’s gold, and they still would not have 10% of their reserves in gold.
China's Gold demand is likely to continue to increase and put significant upward pressure on gold prices for many years to come, particularly if the US Dollar continues to decline in purchasing power as many analysts are predicting it will do. If China's new sovereign wealth fund decides to purchase gold, expect significantly higher gold prices.