China's Gold Investment

China, which is being the largest gold producer in the world, seems to be reluctant to sell its gold, unlike the American government that sold 615,500 ounces in coins only this year. So what it does with all that staggering amount of gold it gets from its mines? Believe it or not, China purchases it for itself, or invests in it, in other terms, last year only buying some 454.1 domestically produced tons. In these conditions, it is no wonder that China ranks the sixth among the largest owners of gold bullion worldwide.

These end results may be understood only if looking at their cause, namely the huge demand that triggered them. Chinese investors put so much of their money in gold products that the demand for gold bullion bars increased by an impressive 44%. But this stands for just a portion of the national demand for gold that jumped by 11.4% in only one year, making China to account for 18.7% of the global demand. By allowing its citizens to own gold, China has increased its domestic demand, given that there are over 1.3 billion of them, eager to work and as eager to consume. The consumer demand for gold reached almost 200 tons last year. Based on such figures, the World Gold Council expects Chinese gold consumption to double in the next decade or so. But however impressive the pace of their gold purchases could seem, the private households are not the ones relevant to gold investment, but the government itself.

The latter purchases gold in response to the global economic situation and its particular position therein. While the Greek debt and related contagion fears might have had an impact on the Chinese investments in gold bars, there is something 'closer' to home that has definitely had. This is its immense American dollar exposure, given that China owns a lot of dollars, being the main buyer of the American debt and the main exporter to the said country. So this is just wise economic policy for China, namely to invest heavily in gold as a protection against its dollar exposure arising from the immense number of American treasuries it owns and its trade surplus coming from the commodities exported to the United States.

Why investing in gold? That's simple. If you don't have faith in currencies, in the dollar in particular, you purchase gold. This is what people (and governments for that matter) do. The economic crisis that seems to go on forever and the huge debt of the world superpower that could only weaken the dollar even further seem to be judicious reasons. On the other hand, if you index the gold price to that in 1900, you can easily see that its value has remained more stable than of any currencies.

In this context, China does nothing more than investing in the stronger asset, which is, in addition, domestically available and cheaper. Well, if the global gold demand will increase as a result and so will its price, at least China would hold enough gold to be rich or solvent, if bad things do happen internationally.

Learn from professionals how to buy gold bullion bars in times of recession.