Based on the theme of the ancient Chinese zodiac, the Perth Mint’s Australian Lunar Coin Series sure puts the spotlight on China. We were cleaned out of stock in the 2010 Gold Lunar Tiger this past week. The Perth Mint’s shelves are also looking bare given that mintage limits were hit back in May. Still in stock, the Silver Lunar Tiger could well be called the Miranda Kerr of the Lunar Series - a stunning coin, but you won’t catch Macquarie banksters gawking at these.

Take a browse through the World Gold Council’s latest report on China if you get a spare moment, the supply and demand statistics are certainly compelling. Pessimism on the broader Chinese macro-economic front has come to the fore over the past few months. Figures released on Wednesday point to weakening industrial output, and talk of an over-inflated housing market has been well publicised. The China bears, now known as pandas, are out in full force, but macro-economic concerns shouldn’t adversely impact Chinese gold demand.  We are looking for the Chinese to diversify into physical bullion to take shelter from the risks associated with a haemorrhaging property market.

Click here for the World Gold Council's full report

Gold in the Year of the Tiger - Eily Ong, World Gold Council

Executive summary

The World Gold Council (WGC) believes that gold consumption in China will continue to catch up with the rest of the world following the deregulation of the Chinese gold market in 2001. Demand from China’s two largest sectors (jewellery and investment) reached a combined total of 428 tonnes in 2009 but domestic mine supply contributed only 314 tonnes during the same year. This shortfall creates a “snowball” effect as China’s gold industry may not be able to keep pace with the annual leap in domestic consumption despite rising to be the world’s largest gold producer since 2007.

Today, gold is regarded as a sign of prosperity, an ornament, a currency and an integral part of Chinese religion.

Although the country’s appetite for gold has grown, making China the second largest consumer in the world, demand in China per capita has a lot of catching up to do to equal that of Western economies. In jewellery, the Chinese per capita consumption is one of the lowest at 0.26gm when compared to countries with similar gold cultures. If gold were consumed at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in this sector alone. Near term inflationary expectations and rising income levels are likely to support the investment

case for gold as an asset class, especially given that Chinese consumers are high savers and are looking to gold to protect their wealth.

The People’s Bank of China (PBoC) is also playing an increasingly supportive role for gold on the demand side. PBoC’s gold holdings are currently at 1.6% of its US$2.4tn total reserves – a fraction by international standards. If PBoC decides to rebalance its books to its recent peak gold holding as a proportion of reserves of 2.2% in Q4 2002, WGC estimates it could account for a total incremental demand of 400 tonnes at the current gold price.

WGC analysis shows that, structurally, supply growth in China could be challenging unless there is more funding directed to exploration. Assuming the US Geological Survey’s figures are correct, China may exhaust existing gold mines in just six years. Despite the strong Yuan, total production costs have also risen by more than 30% in the last six years due to higher input costs (such as energy and labour) and lower ore grades.

The outlook for gold in China remains positive and WGC believes that the balance between demand and supply in the Chinese gold market will continue to be in disequilibrium.

In the longer term, if China continues to grow at near to the current rate in economic and wealth terms, gold consumption in China will continue to expand and has the potential to double during the next decade.