China goes for gold: Demand to hit 1,350 tonne by 2017, says WGC

Written by fe Bureau | New Delhi | Updated: Apr 16 2014, 09:25am hrs
After surpassing India as the world's largest gold consumer last year, China is set to further cement its position and its demand of the bullion may hit 1,350 tonne by 2017, up 25% from the 2013-level, according to the latest report by the World Gold Council (WGC).

The calendar year 2014, however, will most likely be a year of consolidation for China after a 32% rise last year, as some consumers brought forward jewellery and bar purchases last year taking advantage of a price drop. However, rising real incomes, huge private savings and traditional appeal of gold would drive up growth in gold demand significantly from next year onwards, it said.

India, on the other hand, is expected to see demand in the range of 900-1,000 tonne in 2014, compared to 975 tonne a year before, World Gold Council managing director (India) Somasundaram PR told FE on Tuesday. This means China is set to remain the top consumer, at least until 2017, as even a decision on lifting various official curbs on supplies by India is yet to be made.

Chinese firms could have tied up around 1,000 tonnes of gold, equivalent of a nominal value of roughly $40 billion, in financing deals by the end of 2013, said the WGC report released on Tuesday, drawing inputs from various sources. This means the firms might have imported the precious metal to raise funds and beat tight domestic credit conditions, rather than to meet actual consumer demand.

"Restrictions on credit and cross-border capital flows create an incentive for the use of high value commodities as a means of bypassing such restrictions by both companies and speculators. Copper has been a very high profile vehicle for such activity. In recent years, gold has been used in a similar fashion, although this is much smaller and has received much less publicity," said the report.

The use of gold for purely financial operations is a form of demand that represents a small part of the much wider growth in shadow banking, which while entirely legal, is considered a grey area.

While there is little data on the shadow banking sector, but JP Morgan recently estimated it at RMB46 trillion ($1.7 trillion). Similarly, although no hard data are available on the outstanding amount of gold tied up in financial operations, it is feasible that by the end of 2013 this could have reached a cumulative 1,000 tonne, the report added.