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Strike when the metal is yellow

December 7, 2010

In the face of a weakening dollar and rising inflation China and India are amassing gold reserves as security against future volatility. While China openly declared that it bought five times  its 2009  quantity during the first 10 months of 2010 to 462 tonnes, India too, has leaped way ahead of its  total gold imports of 595 tonnes in 2009 to continue remaining the worlds highest gold consumer. In the third quarter of this year, India’s gold imports jumped by almost 100 metric tonnes hitting a new high of 624 metric tonnes, and is expected to reach 750 metric tonnes by the end of this year, despite a 23 percent hike in prices.

Acquiring gold as a reserve against trying times isn’t unusual for either China or India. Entrenched with a fierce attitude to save rather than acquire debt, seeped in religion, and tradition, gold has remained the investment of choice for Asians since centuries. Indian women have traditionally always treasured their gold ornaments, passed on through generations as a security from father to bride on her wedding day and seen as a matter of shame of sell her jewellery to pay off debts.

According to a study by the World Gold Council, over the past decade, gold demand in India has increased at an average rate of 13 percent annually, outpacing the country’s real GDP (6 percent), inflation (8 percent) and population (12 percent). Approximately 10 percent of estimated savings of 30 percent of income is invested in gold and market sentiment still remains positive despite the higher gold price.

Aiming to outpace India as the highest consumer of gold by 2014, Chinese households and banks have made the maximum investments in gold. A safer risk to park money in than property, the Chinese are hording gold to hedge against runaway inflation, which is the highest in 25 months.

Investments in gold are being made across the board in China and India – from jewellery sales and private investments to industrial and central bank demand. Besides banks and state governments acquiring gold as a hedge investment, the rising tide of working women are flooding gold souks, driving up prices. Jewellry remains the main component – 60 percent in world gold demand, gold bars as investments have risen 19 percent in the last year and now account for 30 percent of gold consumption.

Buoyant on gold investments, China has also approved the country’s first mutual fund that bets on gold prices, the Lion Fund Management won approval from the China Securities Regulatory Commission to launch the Lion Global Gold Fund, which invests in gold-backed exchange traded funds (ETFs) overseas.

“The fund offers a brand new way to invest in gold, giving investors access to ‘golden opportunities’ globally,” the Beijing-based fund house said in a statement.

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