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China sees 'explosive' investor demand for gold

February 16, 2011 |  5:52 pm

Gold’s bull market stumbled in January, with the price sliding more than 7% from its all-time high.

But that may have been a gift to Chinese investors, many of whom apparently were buying aggressively into the metal's downtrend.

From Fayen Wong in Reuters’ Shanghai bureau:

Demand in China for physical gold and gold-related investments is growing at an "explosive" pace and its appetite for the yellow metal is poised to remain robust amid inflation concerns, said an Industrial and Commercial Bank of China (ICBC) executive.

ICBC, 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.

The January surge in Chinese gold purchases followed strong buying for much of 2010. The country's imports of the metal rose fivefold last year from 2009.

Even so, gold's rally hit an air pocket last month. After reaching an all-time high of $1,422.60 an ounce in New York on Jan. 3, the price fell for three straight weeks as some investors took profits after the metal’s 30% surge in 2010.

Gold bottomed at $1,318.40 on Jan. 27. The price then turned up again amid the recent wave of unrest in the Middle East.

On Wednesday, near-term futures in New York added $1.10 to $1,374.70 an ounce, still off 3.4% from the Jan. 3 peak.

The Chinese government has been battling rising inflation, particularly in food costs. China’s inflation gauge showed prices up 4.9% in January from a year earlier. Beijing also has been trying to slowly deflate the country’s hot real estate market by tightening credit terms.

Zhou told Reuters that "unlike the property market, investment in the gold sector is something the government is encouraging."

"China has a centuries-long cultural attraction to gold and because we have started at such a low base, I think demand growth will likely stay strong for quite some time," he said.

-- Tom Petruno