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The Daily Reckoning

Jewelry drives up demand for gold

2010 saw a 10-year high for increased demand for gold jewelry.

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With these higher income levels, many in China’s middle class are looking to gold as a means for long-term savings and a possible hedge against inflation. The success of the WGC’s gold accumulation plan is an example. It allows Chinese consumers to purchase small amounts of gold on a routine basis to build a portfolio.

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With more than 1 million participants, the program has been so successful in its first year that the WGC and its domestic partner, ICBC, is launching a new program to encourage the gifting of gold bars. Gold bars as small as 10 grams can be stamped with the Chinese symbol for joy and given to another.

The director of the program in China says, “Gold enjoys a prestigious status with Chinese consumers due to its unique features and association with Chinese tradition. In recent years, the giving of gold as a gift has become an emerging trend.”

What’s important to remember is that this trend is just getting started. You can see from this chart that China consumed roughly one-quarter of a gram per person in 2009. This is significantly less than Hong Kong and Saudi Arabia, which are the most avid consumers, and lower than other Asian countries with cultural affinity for gold.

Gold will be interesting to watch as a barometer of good and bad government policies. In countries such as China, where the embrace of free market principles has ushered in economic growth, gold demand levels should remain strong.

This is what makes today’s gold market different from the 1970s. Back then, today’s emerging market powerhouses, such as China and India, had no global economic impact. Now, these countries aren’t just at the forefront of the gold market, they are global leaders in economic growth.

It is by no coincidence that 30 years after Deng Xiaoping took office in China and began instilling the concepts of free markets, the country has grown to become the world’s second-largest economy behind the U.S.

If countries like China and India continue to grow by 7 to 9 percent a year, the corresponding rise in incomes should keep the fire of the love trade burning. In this scenario, gold can continue to slowly appreciate.

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