Chinese Investors Drive Gold Imports Five Times Higher on Inflation Fears

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The gold rush in China accelerated during the first 10 months of 2010 as investors seeking protection from looming inflation drove imports of the yellow metal up nearly five times more than the amount brought in all of last year.

Gold imports rose to 209 metric tons compared with 45 tons for all of 2009, Shen Xiangrong, chairman of the Shanghai Gold Exchange told a conference held in Shanghai yesterday (Thursday).

"The government hasn't officially said that China is encouraging private gold investments, but we in the industry suspect it. And you can see the big jump in the delivered gold imports through the exchange has to be approved by them," Albert Cheng, managing director of the World Gold Council's Far East department, told Bloomberg News in an interview.

"The central bank may now be approving all gold import" applications, he said.

Government efforts to keep the property market from overheating and a stock market swoon sparked investment demand for gold during the first half of the year. About 70% to 80% of the imports in the first 10 months were made into mini-gold bars, which are favored by Chinese investors, Shen said.

"Given China is the world's biggest gold producer, the sharp increase in its imports is a big surprise," Hiroyuki Kikukawa, general manager of research at IDO Securities Co. in Tokyo, told Bloomberg. "People there need to buy gold to hedge against inflation as the country's tightening monetary policy drives investors from stocks and properties to gold."

Consumer prices in China rose 4.4% in October, the fastest rate in two years and well above the government's stated goal of 3%. China's central bank responded by raising interest rates in October and ordered banks to increase their capital reserves on Nov. 10 and Nov. 19.

"The expectation for higher inflation has fueled great interest among investors to hold physical gold, which led to higher imports," the gold exchange's Shen said. The exchange traded 5,014.5 tons of gold in the first 10 months, up 43% from a year ago.

Retail investment and jewelry demand could double China's gold market in the next decade, the World Gold Council said on Nov. 3. Consumption may climb as high as 900 tons in the same period, Wang Lixin, the council's Greater China general manager told Bloomberg.

Investment demand for gold could hit 150 tons this year, up from 105 tons last year, compared to 3 to 4 tons 10 years ago, World Gold Council's Cheng told Bloomberg.

China, the world's largest producer and second-biggest user, doesn't regularly publish gold-trade figures and rarely comments on its reserves.

China stunned the gold market last year when the State Administration of Foreign Exchange, part of the People's Bank of China, revealed that State reserves had jumped to 1,054 tons since the last such announcement in 2003, when it had 600 tons.

Sun Zhaoxue, general manager of China National Gold Corp, said on Wednesday that China should use its foreign exchange reserves to further boost its gold holdings. That reflects the view of many officials who have said China should buy more gold with its foreign exchange reserves, which totaled $2.648 trillion at the end of September.

As governments continue to debase their currencies in order prop up their ailing economies, the majority of global gold demand is now coming from investors instead of traditional jewelry and industrial applications.

Worldwide investment demand for gold totaled 1,901 tons last year, surpassing jewelry consumption of 1,759 tons for the first time in 30 years, according to London-based GFMS Ltd. In fact, net retail investments in this year's third quarter set a record at $9.6 billion - a whopping increase of 60% over the same period in 2009, Bloomberg reported.

Worldwide, investment demand for gold will be up in 2011, led by China, India, Russia, and Turkey. "Bar hoarding" is on the rise, too, increasing 44% over 2009 as investors increasingly take physical delivery of their merchandise, reports the World Gold Council.

As Contributing Editor Peter Krauth wrote yesterday in Money Morning's annual "Outlook" on gold prices for 2011, investors will react to a classic supply demand squeeze by driving the price of the shiny metal to record highs next year.

"Before 2011 closes out, I predict that each ounce of the prized "yellow metal" will be trading at $1,900 - an increase of about 37% from yesterday's (Wednesday's) closing price of about $1,390 an ounce," Krauth wrote.

Krauth noted that investors who bought in 2001 have experienced a fivefold investment in the "metal of kings." That works out to compounded return of better than 20% a year.

But he's confident that there's more to come.

"Precious metals -and gold in particular - have been the asset class of the decade. But it's not too late to climb aboard - there's still plenty more growth to come," he wrote.

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