Traditionally, the gold trading hubs of the world have been London, New York, and Zurich, Switzerland. In the last decade, however, more and more gold has been flowing to the East.
China, India and Indonesia together count for more than 60% of the world’s gold demand, according to Bloomberg, up from 35% in 2004.
Since 2008, gold demand has doubled in India and increased by 350% in China.
A vault recently opened in Shanghai demonstrates the expectations for the gold market: it can hold 2,000 metric tons of gold, which is almost double the 1,065 metric tons (t) of gold Chinese consumers buy each year, according to an annual report by the World Gold Council (WGC). One metric ton is about 2,200 pounds.
Chinese consumers represented more than a quarter of the world’s total demand for physical gold (as opposed to gold funds), which is about 3,863t. They were followed closely by Indian consumers at 974t.
Total global demand was up 21% in the first quarter of 2016, buoyed largely by Western exchange-traded funds buying gold assets.
Why is gold moving East?
Gold consumption in China and other Eastern countries is often driven by market dynamics. For instance, in 2013 Chinese gold buyers were helped by a global average gold price drop of 16%, according to the WGC (p.1). Sell-offs by gold ETFs at that time, which were down 23%, also fueled purchases.
However, the decade-long trend of consumer demand has been driven by increased purchasing power and an expanding middle class in these countries.
Holding gold is seen as a way for individuals to protect themselves from rising inflation, according to Forbes.
It’s also a protection against capital flight, ensuring consumers a steady storage of wealth even as property prices and stock values decrease.
What’s being bought?
The World Gold Council divides physical gold purchases into two categories: jewelry, and bars and coins.
Image courtesy of the World Gold Council.
Jewelry accounted for 57%, while bars and coins accounted for 43% (p. 23 of the WGC report).
This is a stark contrast to just a decade ago, however, when jewelry accounted for 87% of the total consumer demand of physical gold, 2,973t.
In other words, demand for bars and coins has increased by 460% since 2004, much of it centered in Asia.
Gold bars are also increasingly being recast into smaller, consumer-friendly sizes that are popular in Asia, with exports from the U.K. to refinery sites in Switzerland increasing ten-fold, according to Bloomberg.
Central banks stocking up
Central banks have also been buying up gold in recent years to protect their reserves, although on a much smaller scale than consumers. Russia, which had the largest central bank gold purchase in 2013, bought 77t, according to the WGC (p. 13).
There is also speculation that the secretive Chinese central bank, which doesn’t regularly report on gold buying, has been stocking up.
Either way, the trend of gold flowing from the West to the East is likely to continue, as Chinese demand is set to double in 10 years, and India’s demand will grow at least 3% per annum over the next decade, despite high prices and import controls.