Asia's Explosive Bling Fling

02/28/2011 11:24 am EST


George Wolff

Author, The Biotech Investor's Bible

While diamonds are the Indian girl’s new best friend, demand for gold is really ramping up, thanks to China’s inflation-weary investors, writes George Wolff of China Stock Digest.

Market trends don't usually arrive with horns blaring and headlights flashing. But that's what's happening right now in Asia. I'm talking about a trend with global ramifications.

It's all about bling: about diamonds, gold, and silver. Asia simply can't get enough.

De Beers, the world's largest diamond miner, says it will throw its operations into high gear to meet what it calls "extraordinary" growth from Asia. Diamond sales in China and India exceeded all of De Beers' expectations recently, with China up 25% and India up 31%. Russia's huge Alrosa diamond company reported a 90% jump in sales.

Sales in the US were only up 7%. Still, the global surge has prompted De Beers to plan two new mine openings, one in Canada and one in South Africa.

It would be a mistake to think the Asian bling boom is all about jewelry, even though Asia's gold sales are also through the roof.

China's gold demand has tripled in the last decade to 600 tons a year, according to the latest report from the World Gold Council. But make no mistake. The demand for gold is not slacking off, even though gold prices have been rather soft this year.

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China is suddenly catching up to India, although India continues to be the world's biggest gold consumer. The Gold Council says India was the strongest growth market in 2010. Total annual consumer demand there topped 963 tons. That's a growth rate of 66%.

Sales in India were more than $38 billion, most of that in gold used for jewelry.

China was a much different story. Although gold sales have been "explosive" there, the main growth area has been in gold bought as an investment.

Gold bars and coins are considered the main investment choices in China, and sales of investment-grade gold rocketed up by an unprecedented 70%, topping 180 metric tons in 2010. The Gold Council calls China the strongest investment growth market for gold in the world.

Sales increases in much of Asia might be attributed to newfound wealth. But gold purchased for investment in China has much more to do with rising inflation, weak returns from bank interest rates, and a bubble in the housing sector.

China’s Snapping Up Gold Bars
What do we know about rising gold sales in China this year? Demand for investment-grade gold bars during the recent Spring Festival was reportedly more than 100 million yuan ($152 million) every day.

Just a few days ago, China's Industrial and Commercial Bank reported "frantic" demand for non-physical gold investments. The bank told Reuters: "We issued 1 billion yuan worth of gold-price-linked term deposits in 2010, but we managed to sell the same amount over just a few days in January this year."

Beijing has been actively encouraging consumers to invest in gold and has worked with the banks to develop gold-denominated assets. The ICBC experience shows what a success the swing to gold investment has been.

With global gold production expected to increase by only 2% this year, Asia's booming demand seems certain to affect prices.

The Chinese bank said there was also "voracious" demand for silver this year. The bank sold about 13 tons of silver in January, compared with 33 tons in the whole of 2010. If January's trend continues, the bank's annual sales of physical silver could reach 156 tons. ICBC is the world's largest bank by market cap and it isn't the only one selling precious metals to the Chinese public.

We won't know the totals for China and Asia during the first quarter of the year for a few months. But consider the exponential numbers we are seeing already.

Consider the words "voracious," "frantic," "explosive" and "extraordinary" describing demand for gold silver and diamonds in Asia. These are the kinds of words that could move markets every bit as dramatically.

[Not everyone’s a believer: One contributor offers "Three Reasons to Be Bearish on Gold". There are ETFs for that as well, of course. But Michael Murphy sees a textbook bull market in precious metals at work. And Eric Roseman is looking good after calling the correction at the beginning of the month a buying opportunity.--Editor]

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