Bullion-Buying in China and India, Part 1

Recently released data from the World Gold Council shows that retail investment demand for gold continues to rapidly increase in China. Several reasons are put forth to explain this increased demand by precious metals commentators: rising wealth/income levels in China's population, an increasing distrust of debauched paper currencies (or a concern about "inflation" - which is the same thing), and even the explicit endorsement of gold (and silver) as "desirable investments" by China's government.

These are all valid reasons, and all "drivers" of current demand for gold in China. However, an even more important dynamic is either ignored, or simply unknown to most of these writers: the extreme "liberalization" of China's bullion market. Ironically, precious metals writers have reported (in great detail) on the recent announcement by this government of significant moves to open up China's precious metals market. Yet, the much more significant move by the Chinese government which preceded this has been almost completely ignored.

Starting with Mao, China's citizens were prohibited from purchasing bullion. It wasn't until 2002, that this total ban was partially lifted. However, small purchases of bullion were still not allowed. When you combine the (previously) small incomes of China's population with an official ban on small transactions, the effect of this decree was that gold was still totally out of reach for well over 90% of China's 1+ billion inhabitants.

It was only at the beginning of 2009 that all restrictions on bullion-buying by individuals in China were ended. From that time, it only took about one year for China's gold-buying to surge to a level where (depending on whose numbers you look at), China is either tied with India as the world's largest gold consumer -- or has already vaulted into top-spot.

Clearly, the single most important driver for this demand was the lifting of prohibitions on bullion-buying, and yet that dominant factor has been almost completely overlooked by the precious metals community. Why do I continue to harp on this point?

Unlike the other drivers of demand mentioned (which are based upon current factors), the roughly 50-year ban on bullion-buying in China obviously created vast amounts of pent-up demand. Arguably, this pent-up demand must be satisfied first (since it predates those other drivers), before the Chinese market even begins to be driven by the other factors listed. However, even if you reject this "chronological" interpretation of Chinese demand, it clearly represents a major incremental addition to all the other demand-drivers.