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China, Indian Demand: Key Trend for Gold's Long-Term Bullish Outlook

Friday October 05, 2012 15:39

Editor's Note: Catch the latest addition to Kitco.com! Seasoned Metals Analyst, Kira McCaffrey Brecht will be sharing her extensive commodities knowledge on Kitco.com. Kira has been writing about the financial markets for over a decade -- posts during her career include Managing Editor at TraderPlanet, Chicago Bureau Chief at Futures World News, Market Analyst at Bridge News and Technical Analyst for MMS International and Managing Editor at SFO Magazine.

Brecht: Markets On the Move

The bulk of the world's GDP growth comes from emerging markets.

Have you looked at the numbers lately? Developed nations are expected to post a 1.3% GDP growth rate in 2012, versus a 5.4% pace for emerging markets, according to Nomura economists.

Meanwhile, Chinese GDP growth in 2012 is pegged at 8.1% and India's GDP pace is forecast at 5.5%, says Nomura. While both China and India have seen slower growth rates this year from 2011, it stills smokes any numbers coming out of Western Europe, the U.S. and Japan.

Gold has rallied for many reasons in recent years, including safe-haven flows, a desire for wealth preservation, concerns over currency debasement, an inflation hedge, and in response to the massive global central bank monetary policy accommodation that has flooded the world's financial system with liquidity.

But, in the years ahead, perhaps one of the most important factors for gold investors to remember is physical demand from emerging markets nations, which continue to be the engine for global GDP growth.

Chinese and Indian physical demand for gold stems from a different place than most Westerner's desire to hold gold. Eastern physical demand stems from deep-seated cultural affinity for holding the yellow metal. It is tradition; it is a sign of having made it to the middle class. It is a way to save for a dowry. Jewelry is a way to display a family's wealth.

In Indian gold markets, jewelry is not priced with a rupee amount. The "price tag" simply reveals the number of karats of gold in the necklace or bracelet. The price of the jewelry is changing with real-time changes in the spot metals markets. The seller will calculate the current price of the necklace based on the spot gold pricing. Sounds a lot more like a trading floor than a jewelry store.

China is the world's fastest growing market for gold jewelry demand, according to the World Gold Council. And, Chinese consumers seek the highest levels of jewelry, with over 80% made from 24 karat gold. India is the world's largest market for gold jewelry. In the second quarter 2012, "India and China continued to dominate global consumer demand, accounting for a combined 45% of total jewelry and bar and coin demand," the World Gold Council said.

While recent figures have shown slowdowns in some of the pace of the physical demand, the trends do remain in place, and with a deep seated cultural affinity to buy and trust in gold, those trends will continue.

Unless Western nations are able to shift the current navigation courses for their economies, it will likely be emerging markets nations that will be driving the global growth engine in years to come. With those stronger growth levels comes more citizens rising into the middle class in those emerging economies and more individuals able to reach the milestone for success in their culture—physical gold ownership.

Forget about the Fed, global central banks and the potential for future inflation, emerging market physical demand for gold will be a strong and steady support to the rising price of gold for years to come.

By Kira Brecht, Kitco.com, follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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