Dear Friends,

Please consider the following story carried by Dow Jones relating to China and the gold market and then ask yourself how a price of $1100 for gold will look 5 years from now. This is why gold will continue to remain well supported on any dips in price. We are dealing with long term strategic thinking here versus short term oriented hedge funds.

DJ WGC Study: China’s Gold Demand Rising While Supply To Decline
Sun Mar 28 21:20:07 2010 EDT
By Allen Sykora
Of DOW JONES NEWSWIRES

China’s gold jewelry and investment demand could double in the next decade at the same time the country’s mining output declines, according to a World Gold Council report.

“Our analysis shows that if gold demand were to continue to increase so markedly, domestic supply would be unable to keep pace,” said Eily Ong, investment research manager at the WGC and author of the report. “Whatever the outcome, China’s outlook will almost certainly have implications for the global market.”

China is the second-largest buyer of gold in the world behind India, with consumption of $14 billion, in 2009, the WGC report said. This could rise to $29 billion, at end-of-2009 prices, within the next decade.

This increase can be expected as China’s middle class keeps growing, said Juan Carlos Artigas, another investment research manager for the Gold Council. Roughly 80% of the Chinese gold demand is for jewelry, and China was the only country to post an increase in jewelry demand last year, when consumption dipped in other nations amid high gold prices and global economic weakness.

Furthermore, China’s gold market is not yet “as mature” as in other countries since deregulation allowing gold to be bought freely did not occur until 2001, Artigas said. “Therefore, it has potential to grow,” Artigas said.

China’s per-capital annual purchases of gold jewelry are 0.26 grams, low compared to other gold-buying nations, Artigas said. If this were to eventually increase to the same rates as in other regions such as India, Hong Kong or Saudi Arabia, jewelry-related purchases could increase by anywhere from 100 metric tons to a few thousand. Indian per-capita consumption is 0.34 grams per year.

Gold investment in China has grown in line with gross domestic product and the population since deregulation, and this trend is expected to continue, the WGC said.

“Basically, China will be consuming more than it’s producing, therefore demanding more gold from global sources,” Artigas said.

In fact, the country’s 2009 mine output of around 314 metric tons did not match the jewelry and investment demand of 423, the WGC report said.

Meanwhile, the country’s supply is likely to decline in the future unless the country attracts “significant” capital investment for further exploration, the WGC said.

China increased gold-mining output by 84% in the last decade and is currently considered the world’s largest producer. However, China also has only 4% of the known global reserves, according to the U.S. Geological Survey.

“This suggests China would exhaust its known gold reserves in about six years if they were mining at the same rate as they are mining now,” Artigas said. The global average is 10 to 15 years, he said.

Meanwhile, there would seem to be potential for China’s central bank to add to its gold reserves, the Gold Council said. At 1,054 metric tons, China’s official holdings are more than all but four central banks and the International Monetary Fund. However, Chinese central-bank gold holdings amount to just 1.6% of the country’s total $2.4 trillion in reserves, which is a low percentage by international standards, the WGC said.

If the country simply returned to 2.2%, as in late 2002, this would mean incremental demand of 500 tons at current prices, Artigas said. “Even if they only increase [total holdings] by 10%, that is still an additional 100 tons of offtake,” Artigas said.

-By Allen Sykora, Dow Jones Newswires; 541-318-8765;
allen.sykora@dowjones.com

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