Industrial and Commercial Bank of China Executive Says Gold Still Hot

Demand for gold in mainland China has been "explosive," and the trend suggest the demand will grow even more.

[The Industrial and Commercial Bank of China], the world's largest bank by market value, sold about 7 tonnes of physical gold in January this year, nearly half the 15 tonnes of bullion sold in the whole of 2010, said Zhou Ming, deputy head of the bank's precious metals department on Wednesday.

"We are seeing explosive demand for gold. As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation," Zhou told Reuters.

"There is also frantic demand for non-physical gold investments. We issued 1 billion yuan worth of gold-price-linked term deposits in 2010, but we managed to sell the same amount over just a few days in January this year," Zhou said, adding that such deposits would easily exceed 5 billion yuan ($759 million) this year.

Adding to this trend is government encouragement, which is lacking with regard to property speculation. The intersection of newfound wealth and tradition is making mainland China close to becoming the world's largest gold-buying nation.


It's also a big influence on gold's bull market, which is proceeding despite relatively mild U.S. inflation if official figures are used. The U.S. economy, plus Canada and the Eurozone, are the holdouts when it comes to global inflation. Rather than see the heated-up developing economies as the aberration and low-inflation developed economies as the norm, it might be more sensible to reverse the framing. The U.S., Canada and Euroland have yet to join in a solid global trend of increasing inflation. This perpective jibes better with the gold bull market, not to mention the current bull markets in many quotidian commodities like copper.

Ironically, global inflation may well be the reason why the Fed is copacetic with near-zero interest rates and QE2. Gold's shoot-up has likely been interpreted by them as a reaction to inflation in India, mainland China and other developing economies; all gold does with reference to developed economies is handicap fiscal crises. Hence, the Fed guys evidently decided, gold's path has little useful to say about U.S. inflation.

A nice take for now, but inflation has a tendency to spread.