Chinese Buying Up Gold Like Never Before

China has overtaken the U.S. as the second-largest retail gold market in the world.

Chinese demand for gold products, mainly jewelry gold coins to individuals, rose 18 percent during the fourth quarter, in sharp contrast to India — the world’s biggest market — where demand for the precious metal fell by a staggering 64 percent.

Jewelry and retail investment demand in China reached 363.3 tons, up 23.5 percent from a year ago. Industry analysts expect it to reach 600 tons by 2010.

Amazing numbers when you consider that China’s jewelry market is only about one-quarter the size of India’s.

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But it’s much easier to understand when you look at Chinese banks, which have turned gold into what one Hong Kong banker describes as an "everyday” investment by selling bullion and gold notes across the counter.

World Gold Council experts say that continuing price increases won’t affect gold demand in China because Chinese tend to buy at high prices in hopes of further gains.

The WGC expects mixed prospects for gold in mainland China in 2008, with demand for jewelry slowing but investment demand rising, due in part to the recent launch of China’s first gold futures contracts on the Shanghai Futures Exchange.

Higher gold prices and rising consumption also has spurred China to become the largest gold-producing country in the world last year, beating out former lead producer South Africa by four tons.

The gain, some experts say, might not last all that long because China’s geology can’t sustain significant gold production.

"We expect lower growth from China in 2008 and 2009, with marginal costs continuing to rise as higher grades are exhausted,” Morgan Stanley chief commodities economist Hussein Allidina told the Financial Times.

When compared to the skyrocketing growth in some Chinese industries, gold mining gains appear positively tame.

Yet, in a year in which global gold production dropped, China’s 27-ton output growth was significant.

That’s in part because none of China’s 1,300 licensed gold mines and more than 1,000 gold mining companies there rank among the top five producers in the world.

One company, China National Gold Group, produces 20% of China’s total gold output and holds more than 30% of its domestic reserves.

It also controls Zhongjin Gold, which just received approval from the Chinese Securities Regulatory Commission to sell up to 76.3 million shares to institutional investors. The company’s net income last year jumped by 50 percent, driven by soaring gold prices.

However, China’s relatively small gold reserves—estimated to be only about 7 percent of all the gold on the planet—led a top mining official to tell the state news it was no longer encouraging foreign investment in gold mining.

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