Bullion-Buying in China and India, Part 2

In Part 1, I alerted readers to the problem with using Western labels and Western analysis to analyze the gold markets of other nations -- especially the two titans of the gold market: China and India. More specifically, I pointed out that breaking down demand into the categories of "retail investment" and "jewelry" demand was both arbitrary and inaccurate.

In fact, much of the gold/silver acquired under both of those categories simply represents "savings" rather than "investment" or the mere purchase of a luxury good (i.e. jewelry). Because of this inaccurate analysis, I suggested that (Western) analysts will likely consistently underestimate long-term demand, while overestimating the amount of "scrap" bullion which would/will return to the market.

While much of this analysis applies to both India and China, there are clearly important differences in these two, critical markets for precious metals. Previously, I pointed out that China had only recently removed/relaxed policies which severely restricted the ownership of precious metals. An astute reader immediately provided me with two, important observations.

On the one hand, the reader observed that Chinese citizens always had access to jewelry, and so the ban on bullion ownership was certainly far from a total prohibition of precious metals. This means that the pent-up appetite to which I referred is not quite as voracious as I first indicated. At the same time, I need only point out that those specifically wanting to accumulate precious metals do not (generally) head to their local jeweler to stock-up.

We want actual bullion products (i.e. coins and/or bars) because of their purity, and also because such bullion is clearly denominated by weight, making it much more convenient for commerce. The second observation made by this reader was that on a per capita basis, China does lag most of the world in personal holdings of bullion (as a result of the previous prohibition on bullion-buying). With the recent move by China's government to open up/expand the bullion market even further in China, this can only accelerate Chinese demand -- as it looks to erase that differential in bullion ownership.

Conversely, with India's precious metals market, we have the exact opposite dynamic: as the world's largest precious metals market (historically), India has accumulated a vast stockpile of bullion over the decades (and centuries). This has many interesting implications for analysis. To begin with, India has (by far) the world's most "liquid" gold (and silver) market. Indians can (and do) buy (and sell) gold and silver the way we in the West go to the store to buy eggs and milk.