"China is stepping up efforts to extend consumption in rural areas, including the newly-wealthy people who are trying to own top brand gold for social status purposes," said Cheng Binghai, chairman of the Shanghai Gold & Jewellery Trade Association recently.
Of course, each Chinese family is still buying only a few grams, given high prices and limited incomes. But added up, consumption would cross 430 tonnes this year, 10 tonnes more than India, says consultancy GFMS. Over the next decade, more Chinese will buy gold, at a time when inflation is almost certain to be high, adding to its appeal. In short, China can permanently alter gold's global demand-supply equation.
As top producer and consumer, surely China should control gold prices the same way it has changed the game in metals and soft commodities. But it didn't. That's because with no real end-use, gold's price is derived more from the nebulous value the market ascribes it and competing investment opportunities rather than the iron laws of physical demand-supply. China's impressive physical numbers tend to leave traders cold.
Instead, what really gets them jiving is the 'sentiment' that China signals to the world. China is buying gold because it is nervous about the US dollar, and this fear is contagious. Investors in India and round the world have started accumulating gold too. The subsequent price spike, itself fraught with risk, then becomes almost a self-fulfilling prophecy. So, China's buying definitely added to the 28% (in rupee terms) spurt in gold prices last year.
Ultimately, China's real power comes from its hard-headed attitude. Chinese families may have just figured the virtues of gold as a safe haven, while we have passed it down generations to survive war, unemployment, debt, crop failure and marital break-up. But here is the nub: we hate selling gold. For the Chinese, sentiment doesn't come into it, at least for now. Plus, they are far more market-savvy.
If the timing is right, they may well encash their investment. No fund manager or trader can afford to ignore this chilling fact. China's growing presence in the physical gold market is awe-inspiring. But China's pragmatic approach to gold makes it the really big kahuna.