Chinese investors are snapping up gold bars and coins, buying more than ever before in the first quarter of 2011 and overtaking Indian buyers as the world's biggest purchasers of the metal.
China's investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India's modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India's 23%.
The report underscores the rising appetite for gold among the growing middle-class in China. Fears of the country's soaring inflation, as well as a search for new investments, is luring investors to gold, and marketing of the precious metal has also increased in recent months.
"I think people will be surprised by the strength in the Chinese demand, but we think this is a trend that is set to continue," said Eily Ong, an investment research manager at the gold council.[More from WSJ.com: LinkedIn IPO Soars, Feeding Web Boom]
Historically, India has been the largest investment market for gold. In 2007, just before investing in gold began to take off globally, India's physical gold demand accounted for 61% of the world's total. China's was 9%. In terms of total consumer demand, which also included jewelry, India is still a bigger consumer of gold than China, taking in 291.8 tons in the first quarter, compared with China's 233.8 tons.
Still, the voracious appetite shown by Chinese buyers prompted the gold council to increase its forecast for the nation's demand.
"In March 2010, we predicted that gold demand in China would double by 2020; however, we believe that this doubling may in fact be achieved sooner," said Albert Cheng, the World Gold Council 's managing director for the Far East. "Increasing prosperity in the world's most populous country coupled with their high affinity for gold will serve to drive demand in the long term."
Aside from having more money, Chinese investors are also focused on using gold as a protection against rising consumer prices. Unlike paper currencies, gold retains its value when prices increase. That has prompted many Chinese investors to flock to the precious metal.[More from WSJ.com: Flood Off Fees Flows Into Bank Coffers]
Gold also is favored by savvy investors as an alternative investment vehicle to assets like shares and real estate. Chinese stock markets have been a disappointment recently, and the government has pledged to clamp down on housing speculation.
Many banks and jewelry stores in China have added outlets to sell gold bars and coins in recent months.
"Those new outlets have not only created demand but also required a starting stock," which has an impact on total gold demand, said Philip Klapwijk, chairman of GFMS Ltd., a London-based metals consultancy that compiles the data for the gold council's report.
Investment demand is one part of a broader base of buying. Jewelry demand remains another large source of gold purchases, the segment that India continues to dominate. India's jewelry sector took in 206.2 tons in the quarter, well above China's 142.9 tons. Still, China is catching up there, too. Its jewelry demand rose 21% in the quarter, faster than the 12% rise in India.
Demand for gold in the Chinese technology sector is also buoyant, with the country becoming an increasingly important center for electronic-component manufacturing and assembly, the gold council said.
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The surge in overall buying came at a time when gold prices took a rare breather from their relentless march higher. Gold prices fell about 8% in late January to about $1,300 an ounce. Since then, prices have risen to $1,492.20 an ounce on Thursday and the metal is up 5% for the year so far.
Global gold investment demand increased by 52% to 366.4 tons in the first quarter, helping offset a 56-ton outflow from exchange-traded funds, which are popular investment tools in the West.
In developed countries, some investors have switched into physical gold holdings from ETFs. Demand in Germany and Switzerland both more than doubled, while the U.S. had a 54% jump to 22.5 tons during the quarter.
As the world's largest gold producer, China churned out 350.9 tons in 2010, but it wasn't enough to sate total demand— including bullion, jewelry and technology uses—of more than 700 tons, according to the gold council's report. As demand continues to outpace supply, analysts expect China to import more bullion.
Thursday's report covers only private-sector demand, but one wild card for the world's gold market is how much gold China has been adding to its foreign reserves. Governments tend to announce their purchases after they buy.
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- World Gold Council