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WGC's Toussaint: China, India Account More Than Half Of Global Gold Demand

Montreal-- (Kitco News) -- The emerging markets of China and India now collectively account for more than half of global gold demand, and their consumption is likely to keep rising as their populaces become more prosperous, said an official with the World Gold Council.

"There is a continuing surge of demand coming from the emerging markets, led by India and China," said Jason Toussaint, managing director, U.S. and investment, for the WGC. "Those two economies are growing extremely rapidly. They are each growing at GDP rates of over 9%."

The bottom line is demand in these nations is being generated largely through "wealth creation," rather than the safe-haven-type demand occurring in Western nations due to worries such as a "financial-market Armageddon" a "race to the bottom" in currency devaluations to gain an economic edge, and general worries about the economy.

"The preponderance of demand going to India and China is now 52% and is tipping the scales," Toussaint said during an interview with Kitco News at the London Bullion Market Association's annual conference occurring this week in Montreal.

In the West, gold tends to be purchased as either jewelry or an investment. Also, many investors might be turning to gold for the first time due to volatility in equities and worries about global credit markets, and there is no empirical data on how much of this demand is likely to be permanent.

But there is a dichotomy between this demand and the type coming from India and China, Toussaint said.

Denizens of these nations tend to buy gold as an investment and jewelry at the same time, Toussaint explained. "It's estimated that 70% of bars and coins that are bought in India will at some point in its owner's lifetime be turned into jewelry," Toussaint said.

In fact, visitors to a typical jewelry shop in India or China likely will not find a fixed price on the items they want to buy, as they would in say New York City. "They will tell you the fineness of it and the weight of it, and then there is a live price in the jewelry shop, and there are calculators. Then you calculate the cost and there is a very small charge for labor for actually making the piece."

The cultural affinity for gold in India and China, coupled with a growing middle class with more discretionary income, is likely to mean a "continuing surge in demand from those two countries," he said. As of now, much all of the gold bought in India is acquired by the top 40% of the households.

"The bottom 60% of that society cannot afford or has no access to gold investment," Toussaint said. "It's not as if the bottom 60% don't want gold. They just can't afford it yet, with 'yet' the key word."

Gold Council Highlights Gold's Role As Portfolio Diversifier

The World Gold Council is a market-development organization for the gold industry. Officials are working to making the investing public aware of the diversification and portfolio-protection qualities of gold, as well as its role as an inflation hedge, Toussaint said. Otherwise, the main focus in any market tends to be simply price direction and what type of return to expect.

"The real magic of gold in a portfolio comes from its diversification benefits," Toussaint said.

The metal tends to be negatively correlated to significant downturns or cyclical weakness in the broader financial markets, he related, meaning gold often rises when other markets tank.

"That has nothing to do with 'will gold go to $2,000, $3,000, etc.'," he said. "Even if gold has a zero nominal return, it may make sense for investors to hold it for those benefits."

In fact, the council has done a study showing gold as a "tail-risk" hedge. This took a look at how gold fared compared to the broader markets following events such as the 1987 equity-market crash, the Long-Term Capital Management crisis, the bursting of the technology bubble, the 2002 downturn and more recently the so-called "Great Recession."

"We found consistently that in the vast majority of those market sell-off periods, gold had a positive return," Toussaint said, adding that this studied a roughly two-week period rather than single-day action.

There has been some change in investors' mindset following the sharp financial-market weakness that set in during 2008, Toussaint said. Previously, it seemed nearly all markets tended to rise, and some investors were even turning to "frontier markets" of nations that had not yet attained "emerging-market" status.

"Many investors are now understanding and saying…maybe it is just as important to minimize downside risk as it is maximizing up side," Toussaint said. "That mindset makes them more willing to hear the gold-investment story."

Further, Toussaint related, portfolio managers might also be looking at the difference between gold and other commodities for diversification. Often, commodity indices do in fact offer diversification.

"But when you have stress and cyclical downturns in global equity markets, (and) when global industrial output goes down, the price of oil goes down…That's where gold can kind of stand on its own."

By Allen Sykora of Kitco News; asykora@kitco.com

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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