Year of Dragon lifts China gold demand

China has overtook India as the world's largest consumer of gold jewellery during the third quarter of 2011. The new year holiday has become a strong source of demand as traditional gifts are being replaced with gold for the year of the dragon.

January 23, 2012 10:23 am
By Leslie Hook in Beijing
Financial Times

“Gold can’t be faked,” says Mr Zhang with all the zeal of a first time buyer of the precious metal. The 29 year-old advertising clerk, who prefers not to give his first name, has just spent a month’s wages, Rmb8,000 ($1,266), on a bracelet, as a gift for his fiancé at Chinese New Year.

He is not alone. Standing in Beijing’s Caibai store, the capital’s largest gold shop, he is surrounded by shoppers. These range from first time buyers picking up single items to veteran purchasers looking for an investment opportunity.

China overtook India as the world’s largest consumer of gold jewellery in the third quarter of 2011. The new year holiday, which started on Sunday night, is now a powerful source of demand in global gold markets as traditional family gifts of cash or presents are being replaced by gold for the auspicious year of the dragon.

“People who work in the city go back to their [village or town] for new year,” said Albert Cheng of the World Gold Council, a lobby group for the industry.

They bring back “all kinds of gifts, including clothes and electronics and whatever is not available in the village,” he added. “And increasingly this includes gold, too.”

Rising incomes in China have fuelled consumer spending on luxury items. Buyers look to gold as a more durable store of value at a time when other investment options in the country are extremely limited.

Gold consumption figures are inexact and estimates for the Chinese new year shopping period have yet to come out. But sales figures from Caibai help tell the story.

The value of sales in 2011 rose 61 per cent from the previous year, hitting Rmb 11.6bn ($1.8bn). The first weekend in January saw sales increase 50 per cent from the previous year, as customers stocked up on new year gifts.

“My grandchild will be born in March or April and I want it to have a gold dragon locket,” explains Ms. Wang, a frequent gold shopper, as she waits in line at the Caibai store.

She has picked out a pendant that costs more than $600, and she says she regularly buys gold jewellery for her family when the occasion calls for it.

Chinese gold shops have been preparing for months for the new year’s rush, but inevitably some are still sold out of the most popular products.

At one downtown branch of ICBC, the Chinese bank, a manager says that they have sold out of the small 50g gold bars amid the rush.

“Some customers just walk in and buy a bunch of 100g gold bars all at once,” says the manager with an air of surprise. A bar of that size costs more than $5,500 at current prices.

“People like to give them away,” she shrugs. “Companies come in too to buy gold bars for presents.”

While most gold purchases are driven by individuals, anecdotal evidence suggests Chinese businesses are buying more and more bullion as well.

“Some companies are giving out gold instead of cash to their employees,” said Jia Zhihong, founder of Kingold, a Wuhan-based jewellery maker.

China’s gold rush has been surprising in its strength and persistence, analysts and traders say.

Gold sales went up significantly in 2010, as investors sought refuge from inflation. But the gold craze has continued even as inflation cooled to it current 4.1 per cent.

In an environment where investment options are limited and bank accounts yield negative real interest rates, Chinese savers are increasingly turning to gold as an investment.

“Think of it like investing in the stock market,” says a cheerful clerk at the China Gold shop. “Gold maintains its value much better than stocks. And with the eurozone crisis the price is starting to head back up again.”

As for Mr Zhang, he just hopes his fiancé likes the bracelet.

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