Is 2012 the Year of the Golden Dragon?

Earlier this month, markets learned that China's gold imports from Hong Kong reached a record high in November. The Hong Kong government reported that Mainland China purchased 102,779 Kg gold from Hong Kong, a 20% increase from October and an all-time high. It was the fifth consecutive month of record gold purchases from Hong Kong. Over the weekend, new data was released that showed strong gold demand in China has continued into the new year.

While 2012 is known as the Year of the Dragon in China, it could very well be the year of gold for investors. According to data released by the Ministry of Commerce, sales of gold, silver and jewelry increased 57.6% at Caibai during China's week-long Lunar New Year holiday. Caibai is one of Beijing's most popular gold retailers. Guan Qiang, assistant manager at Caibai explained, "Long treasured by Chinese, gold is no longer owned only by a privileged few, but has become a new investment channel open to all." More Chinese customers are purchasing gold as a way to give a gift that will also offer protection from inflation and preserve wealth, as opposed to plastic trinkets that decrease in value.

Xinhua, the official press agency of the government of the People's Republic of China reports, "During the week-long holiday, which lasted from January 22 to 28, the sales volume in Caibai and Guohua, another of Beijing's top gold retailers, reached about 600 million yuan ($95.28 million)." According to the Beijing Municipal Commission of Commerce, the sales number represents a near 50% increase from last year's Spring Festival. Much like the United States, negative real interest rates and a troubled property market limits investment options in China.

Property consultant Shanghai UWin Real Estate Information Services Co. released an update that showed Shanghai new home prices plummeted almost 41% in the week ended January 29. Sales during the Chinese Lunar New Year declined to their lowest level since 2006, as volume was 36% of the 7-year average for Chinese holidays. The recent data points to a clear indication that the appetite for gold in China is increasing as other investments falter. The PBOC Zhang Jianhua recently said, "No asset is safe now. The only choice to hedge risks is to hold hard currency-gold."

Although the Lunar New Year holiday is nearing its end, gold is likely to remain in heavy demand. Tom Kendall, a precious metal analyst at Credit Suisse in London, believes Chinese gold imports could hit nearly 500 tons for 2011, up from only 245 tons in 2010. Over the next couple years, many expect China to surpass India as the world's top gold consumer. According to the World Gold Council, strong demand for gold investments and jewelry will drive China's total gold demand to 750 tons in 2011. Marcus Grubb, Managing Director of Investment explained, "Increasing levels of inflation, the U.S. credit rating downgrade, a worsening Eurozone sovereign debt crisis and the lackluster performance of many assets drove investors to increase holdings in gold in order to protect their wealth."

Eric McWhinnie, Wall St. Cheat Sheet