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CHINAGOLDREPORTGoldintheYearoftheTigerTheWorldGoldCouncil’smissionistostimulateandsustainthedemandforgoldandtocreateenduringvalueforitsstakeholders.Theorganisationrepresentstheworld’sleadinggoldminingcompanies,whoproducemorethan60%oftheworld’sannualgoldproductioninaresponsiblemannerandwhoseChairmenandCEOsformtheBoardoftheWorldGoldCouncil(WGC).Asthegoldindustry’skeymarketdevelopmentbody,WGCworkswithmultiplepartnerstocreatestructuralshiftsindemandandtopromotetheuseofgoldinallitsforms;asaninvestmentbyopeningnewmarketchannelsandmakinggold’swealthpreservationqualitiesbetterunderstood;injewellerythroughthedevelopmentofthepremiummarketandtheprotectionofthemassmarket;inindustrythroughthedevelopmentoftheelectronicsmarketandthesupportofemergingtechnologiesandingovernmentaffairsthroughengagementinmacro-economicpolicyissues,loweringregulatorybarrierstogoldownershipandthepromotionofgoldasareserveasset.TheWGCisacommercially-drivenorganisationandisfocussedoncreatinganewprominenceforgold.IthasitsheadquartersinLondonandoperationsinthekeygolddemandcentresofIndia,China,theMiddleEastandUnitedStates.TheWGCistheleadingsourceofindependentresearchandknowledgeontheinternationalgoldmarketandongold’sroleinmeetingthesocialandeconomicdemandsofsociety.AboutTheWorldGoldCouncilChinagoldreportGoldintheYearoftheTigerIntroduction 5Gold demand in China – a new world of opportunity 8 Originsofgolddemand8Overviewoftheearlygoldmarket9Recenteconomictrends10DemandcontinuestostrengtheninChina16China’smarketshareofdemandforgoldandselectedcommodities21Goldpriceandseasonality22Jewellery–potentialdemandgrowthgivencurrentlowpercapitalevel23Investment–anopportunitytoplaycatchup?27Industrialdemand40CentralBank–thePeople’sBankofChina45Supply in China 52 Overview52Minesupply53Goldproducers–domesticandforeign56Risingcostofproduction58Minesupplygrowth–takingacloserlookatreservesandresources59Recycled gold 65The long-term outlook for the Chinese gold market 68Conclusion 70ContentsChinagoldreportGoldintheYearoftheTigerGoldintheYearoftheTigerEily Ong, World Gold CouncilExecutive summaryTheWorldGoldCouncil(WGC)believesthatgoldconsumptioninChinawillcontinuetocatchupwiththerestoftheworldfollowingthederegulationoftheChinesegoldmarketin2001.DemandfromChina’stwolargestsectors(jewelleryandinvestment)reachedacombinedtotalof428tonnesin2009butdomesticminesupplycontributedonly314tonnesduringthesameyear.Thisshortfallcreatesa“snowball”effectasChina’sgoldindustrymaynotbeabletokeeppacewiththeannualleapindomesticconsumptiondespiterisingtobetheworld’slargestgoldproducersince2007.Today,goldisregardedasasignofprosperity,anornament,acurrencyandanintegralpartofChinesereligion.Althoughthecountry’sappetiteforgoldhasgrown,makingChinathesecondlargestconsumerintheworld,demandinChinapercapitahasalotofcatchinguptodotoequalthatofWesterneconomies.Injewellery,theChinesepercapitaconsumptionisoneofthelowestat0.26gmwhencomparedtocountrieswithsimilargoldcultures.IfgoldwereconsumedatthesameratepercapitaasinIndia,HongKongorSaudiArabia,annualChinesedemandcouldincreasebyatleast100tonnestoasmuchas4,000tonnesinthissectoralone.Near-terminflationaryexpectationsandrisingincomelevelsarelikelytosupportChart1:Goldandcumulativegoldsupplyanddemand(tonnes)inChinaChart1:Goldandcumulativegoldsupplyanddemand(tonnes)inChina01,0002,0003,0004,0005,0006,0007,0008,000198919901991199219931994199519961997199819992000200120022003200420052006200720082009Cumulativesupply(t)Cumulativedemand(t)Gold(Yuan/oz)Source:GFMSLimited,WGCestimates,theBLOOMBERGPROFESSIONALTMserviceChinagoldreportGoldintheYearoftheTigertheinvestmentcaseforgoldasanassetclass,especiallygiventhatChineseconsumersarehighsaversandarelookingtogoldtoprotecttheirwealth.ThePeople’sBankofChina(PBoC)isalsoplayinganincreasinglysupportiveroleforgoldonthedemandside.PBoC’sgoldholdingsarecurrentlyat1.6%ofitsUS$2.4tntotalreserves–afractionbyinternationalstandards.IfPBoCdecidestorebalanceitsbookstoitsrecentpeakgoldholdingasaproportionofreservesof2.2%inQ42002,WGCestimatesitcouldaccountforatotalincrementaldemandof400tonnesatthecurrentgoldprice.WGCanalysisshowsthat,structurally,supplygrowthinChinacouldbechallengingunlessthereismorefundingdirectedtoexploration.AssumingtheUSGeologicalSurvey’sfiguresarecorrect,Chinamayexhaustexistinggoldminesinjustsixyears.DespitethestrongYuan,totalproductioncostshavealsorisenbymorethan30%inthelastsixyearsduetohigherinputcosts(suchasenergyandlabour)andloweroregrades.TheoutlookforgoldinChinaremainspositiveandWGCbelievesthatthebalancebetweendemandandsupplyintheChinesegoldmarketwillcontinuetobeindisequilibrium.Inthelongerterm,ifChinacontinuestogrowatneartothecurrentrateineconomicandwealthterms,goldconsumptioninChinawillcontinuetoexpandandhasthepotentialtodoubleduringthenextdecade.ChinagoldreportGoldintheYearoftheTigerIntroductionGoldplaysavitalroleinChineseculture.TheChinesehaveastrongaffinitytogoldwhencomparedwithWesterncountries.GoldhasbeenpresentinChinesehistorysincethetimeoftheHanDynastyandeventodayisregardedasasignofprosperity,anornamen