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Latent demand expected to take tarnish off gold

By Zhang Bingnan (Global Times)

10:20, May 22, 2013

Much to the chagrin of the Chinese bargain hunters who scooped up gold at the beginning of the month, prices for the precious metal have fallen steadily over the past two weeks. With gold's near-term direction still a matter of heated speculation, many retail investors in the country are now asking themselves whether it might be time to cut their losses.

True, the market's appetite for gold may be sated for the time being, as evidenced by the metal's continued slide. But over the long haul though, the yellow metal is probably a better choice for inexperienced Chinese retail investors than most other assets.

Indeed, with the US, Japan and several member states in the European Union loosening the reins on their monetary policies, many central banks around the world have bought gold bars in an attempt to diversify their foreign reserves. Overall, central banks from developed countries were net buyers of 534.6 tons of gold bars last year, and are expected to add between 450 and 550 tons of additional bullion to their reserves this year, the World Gold Council reported on April 26.

Meanwhile, several other countries - such as India, Russia, Thailand, Singapore and South Korea - which have traditionally held smaller quantities of gold relative to the rest of their reserves have also pledged to make large gold purchases this year, which will undoubtedly revive demand and pique prices moving into the coming months. In fact, Russia and Turkey alone were seen buying 4.7 tons and 33 tons of gold respectively in March - the fourth and the fifth consecutive month of net gold purchasing for the two countries - according to a report released on April 25 by the International Monetary Fund.

Of course, we can't overlook the fact that many global investors continue to harbor a soft spot for gold. These investors are still inclined to hold gold as a hedge against inflation and financial uncertainty, especially as the specter of the 2008 global financial crisis continues to cast a shadow over the international capital market. Even with equities and riskier investments showing signs of recovery, it may be some time before investors pull out of safe havens.

Given the limited number of reliable investment options which are open to Chinese capital holders, it's not surprising that local investors were caught up in a buying frenzy. Underperforming stocks, scandal-blighted wealth management products and the fickle art market are all becoming less attractive for Chinese people with excess capital. Compared to these choices, gold might not be such a bad bet after all.

The author is secretary-general of the China Gold Association.

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