Why China Is a Key Reason to Be Investing in Gold

Recently, a major event was held that sent a signal to anyone interested in investing in gold.

For the first time ever, the London Bullion Metal Association (LBMA) held its annual meeting in Hong Kong. It is a trade group that represents the wholesale market for gold and silver and it's telling that it decided to have its meeting in Hong Kong.

However, the site choice should not come as a surprise to anyone following the gold market. China has become more and more important to the gold market. The Asian giant's imports of the shiny yellow metal have become a key factor in gold's positive price performance over the last few years.

Investing in Gold: China's Role

Bullion demand from China has soared in the past several years.

In 2007, China accounted for just 10% of global gold demand. By 2011, China was responsible for 21% of global gold demand. This trend can easily be seen in figures from the World Gold Council (WGC). It said gold demand in China has risen from about 250 tons in 2006 to almost 800 tons presently.

What the WGC numbers don't tell you about though is how China's central bank, the People's Bank of China, is buying gold. Gold imports into China via Hong Kong (the route the central bank uses) has continued to rise rapidly despite a dip recently in gold buying by Chinese consumers.

Hong Kong has seen on average about 65 tons in gross imports of gold per month. Year-to-date China has imported an astounding 582 tons of gold, more than the official holdings of another country well known for loving gold, India.

It is not shocking that the Chinese central bank is trying to get its hands on large amounts of the precious metal.

As David Gornall, chairman of the LBMA, told the conference "The country [China] has only 2 percent of its reserves in the form of gold." He added "that allocation can only go in one direction."

LBMA Gold Forecast

Despite the bullishness on Chinese gold demand, the participants of the LBMA conference were rather reserved about next year's outlook for gold.

Much of the caution had to do with worries about India's economy. India, prior to 2012, was the world's largest consumer of gold and is now neck-and-neck with China as far as demand goes.

By the time of the next conference in September 2013, participants predict that gold will be trading at $1,843 an ounce. The prior LBMA forecast, before the conference began, was for gold to be trading at $1,914 an ounce.

The delegates seemed to be more cautious this year after last year's optimism. A forecast of gold at $2,019 an ounce did not pan out. In 2012, gold has spent most of the year trading in the $1,530 to $1,800 range.

China and Gold: Just Beginning

Despite being in Hong Kong, the attendees may have underestimated the demand for gold that will be coming out of China in the years ahead.

Zheng Zhiguang, general manager of precious metals of Chinese bank ICBC, told the Financial Times the gold market in his country is "only just beginning". He believes China's gold market could be "entering a period of more sustained and steady growth, thanks to rising incomes and improved investment access to gold.

This is a key point that those investing in gold need to keep in mind. . .improved investment access by the average Chinese citizen to gold.

Marcus Grubb, managing director for investment at the WGC, expects investment demand for gold in China to be boosted by the launch of the first gold exchange traded fund (ETF) in 2013. He told the FT, "There are investors not able to access the gold market as liquidly as they would like and the ETF obviously opens up a lot of avenues there."

If the gold ETF catches on with Chinese investors, it may one day be as large as the biggest gold ETF in the United States - the SPDR Gold Trust (NYSEArca: GLD). The world's biggest bullion-backed ETF currently holds in excess of 43 million ounces of gold.

Add that ETF demand to the buildup in gold reserves by the Chinese central bank and the forecast by Money Morning's Global Resources Specialist Peter Krauth of $2,200 per ounce in 2013 will seem almost as conservative as the one by the LBMA.

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