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4 Reasons Gold Remains a Safe Haven

Stocks in this article: SGOL IAU GLD WFC UXG

3. Jewelry Buying

The often forgotten role of gold: jewelry. It accounts for almost 50% of global demand and the primary buyers are China and India. In the second quarter, according to the World Gold Council, India accounted for 32% of world jewelry demand at 139.8 tons while China followed a close second, up 16% at 102.9 tons.

"India and China are extremely important in terms of gold demand currently," says Marcus Grubb, managing director at the World Gold Council, who believes that this strong consumption is not just a short term phenomenon.

China accounted for 6% of total global demand in 2000. That number surged to 18% in 2010. Grubb even estimates that China could have imported more than 260 tons by April, surpassing its imports for all of 2010. "This remarkable shift in the global demand balance has come about as the combined forces of growing wealth, deregulation, increased access and also heightened economic concerns have compelled consumers to act on their deep affinity for gold," said the World Gold Council.

According to a report by Wells Fargo, India's GDP per capita is half of China's: $6,567 vs. $2,941, respectively, but both countries are getting richer. China's urban household income is growing 9% a year and consumption is growing 11%. Despite the global slowdown many experts think that China will still grow 9% in 2011 and that India will grow 8.2%. More growth and more money mean more people and cash to buy gold.

Bloomberg recently reported that India could buy 250 tons of gold in the fall during its festival and wedding season. India tends to look for price dips to buy while China can be a voracious consumer regardless.

Reuters said their channel checks pointed to strong gold demand among Chinese jewelers throughout August, despite recent record high gold prices. Inflation is high in China and India, at 6.5% and 9.22%, respectively, which is another reason why gold is so attractive. The only thing that can derail that thesis is higher interest rates.

China has raised rates 5 times in the past two years to fight rising prices but even with the 3.5% interest rate, real rates are still negative 3%.

There are those like Grubb who think that China has been able to tame inflation and that growth has cooled along with property restrictions, which means the tightening cycle might be over. India, on the other hand, has rampant high inflation but gold buying is more dependent on wealth and tradition rather than inflation, says Grubb, who doesn't think that India will be quick to raise interest rates.

"You've actually seen some strong investment numbers in India for the first time in recent quarters but the bulk of demand is jewelry related and not investment." So far the World Gold Council's antidotal evidence on third quarter gold demand is pointing to an even stronger showing.

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