Why Asians prefer Gold
That the gold price is being driven by emerging Asian consumers should not be all that surprising given a familiar economic backdrop in the major markets in the region: that of negative real interest rates. Governments have been regulating deposit rates, effectively forcing negative real rates on consumers in order to stimulate fixed investment.
In addition to this, the incentive to buy gold has been further fuelled because of capital controls that restrict outward investment. Chinese and Indian citizens have few alternatives in which to invest their savings, especially given equity markets that lack depth and sufficient regulatory oversight. Poor recent returns and numerous accounting scandals in these equity markets have further discouraged investment. Of the remaining alternatives, gold and platinum jewelry, gold bars and coins and real estate have become the most popular. One only has to look at luxury goods sales growth in the region or data from the platinum industry, where Chinese jewellery demand is now the largest single demand segment at 20% of the market to find confirmation of these trends.
According to GMO, “coupled with this ‘financial repression’, savings in emerging markets rose dramatically in both relative and absolute terms between 2000 and 2010. In 2000, emerging markets accounted for roughly 25% of global GDP. By 2010 this figure reached 40%. Domestic savings rates in China rose from a 41% average in the 90s to 47% in the 2000s while India’s savings rate rose from 23% to 29%. Consequently, combined gross savings in China and India increased from $557 billion in 2000 to $3.4 trillion in 2010.” Given this explosion of money available to invest and a dearth of suitable alternatives described above it is no wonder the price of these investments have soared.
The final piece in the Chinese demand puzzle is the currency.
Chart 5 below shows that since the currency’s US$ peg was relaxed in 2005 it has appreciated by roughly 24% against that currency. Simply put, relative to the majority of other global investors the price of gold has not appreciated to the same extent.