China Holds the Keys to the Gold Market

Last year China's private-sector demand for gold reached a record level of 1,132 tonnes, and according to the World Gold Council (WGC), the Asian nation could easily dominate the gold market once again, as they predict demand growing 20% by 2017.

This updated projection from the WGC confirms what I've written about previously: China's love for the precious metal remains robust.

We are witnessing this country transform into an economic powerhouse, and now, the world's largest gold market!

Investors would do well to recognize the following main drivers behind this tremendous growth.

1. A new middle class has more money to spend.

Despite all the grandiose numbers we see in China's gold market, the Asian nation hasn't always been the "golden goose" of the game.

The WGC points out in its recent report, "China's Gold Market: Progress and Prospects," that only in the last several years has China seen an emerging middle class supported by higher incomes.

For example, Shenzhen is currently a city with more than 10 million people, accounting for 70% of China's jewelry fabrication. Just 30 years ago however, it was only a small town of around 330,000 people, meaning consumer demand for gold at that time was minimal at best.

Over the last 10 years, however, a new middle class has emerged, and consumers have been enjoying their new wealth. As gross domestic product (GDP) began to rise, people started buying more gold jewelry and coins.

In addition to increased spending on these items, the investment demand for the yellow metal progressed as the population sought a hedge against inflation.

2. Jewelry is still the top demand driver.

The WGC report also reaffirms the ongoing power of the "Love Trade." The Love Trade, one of the two main drivers of gold, along with the "Fear Trade," relates to the cultural affinity for the precious metal, particularly in Asia, India, and the Middle East.

Consumers continue to purchase gold jewelry and coins year after year, and demand rises in synch with gift giving for religious holidays and celebrations.