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For every investor in the Western world who sells an ounce of gold, picture a multitude of eager buyers in the East who are thrilled by the long-term investment opportunity.
Though not a particularly technical means of understanding the complex dynamics of global supply and demand for gold, that image does illustrate an important aspect of the bullish trend for gold demand that continues to play out on the world's stage.
Much has been made recently of the decision by George Soros to sell the vast majority of his fund's stake in the SPDR Gold Trust (NYSE: GLD ) during the first quarter of 2011, emboldening the predictable chorus of bubble babble that plays incessantly in the background behind gold's symphony of sustained upward momentum. But while Soros and several other fund managers were busy locking in impressive gains from gold, an incredible surge in gold demand from Asia continues to pave a rising concrete floor beneath long-term gold prices.
The World Gold Council released its quarterly review of global demand last week, which revealed that China's total investment demand surged an astonishing 123% over the prior-year quarter to oust India from the No. 1 position with 90.9 tons of demand. Thanks to a world-dominating market for gold jewelry, India retains the lead for total gold demand, but the growth trend visible from China strongly suggests an imminent ascent to become the world's foremost market for physical gold.
Understanding China's role in the outlook for gold prices
The persistence of massive budget deficits, loose monetary policy, an unrepentant degree of leverage and derivative exposures within Western financial behemoths, and the U.S. dollar's uncertain future as the world's primary reserve currency ... all of these factors and more combine to ensure that economic developments in the Western world will continue to command the spotlight as fundamental drivers behind gold's ongoing secular bull market.
But to examine the outlook for gold exclusively in those terms is to ignore the central role that Eastern culture, economic trends, and prevailing demographics are each likely to play in subsequent phases of gold's multiyear advance.
Gold's immutable legacy as an enduring store of value is firmly rooted in both cultural traditions: East and West. However, whereas the Western world shifted to an unmistakably negative prevailing attitude toward gold during the 20th century -- devolving ultimately into widespread prejudice against advocates of investment exposure to gold -- China is described by the WGC as sharing a "similar gold culture and heritage" with India. Thus, it may come as no surprise that we are witnessing a much faster cultural reprioritization of gold as a broadly popular investment asset in China than we have observed in the West to date. Indeed, for all the widespread bull-market hoopla surrounding gold, total consumer demand for gold (jewelry and investment demand combined) in the United States actually fell by 3% over the trailing 12 months through March 31, 2011; while in China that demand grew by 37% over the prior-year period.
Buyers of gold in India and China are cognizant of the debt-driven currency distress prevailing in Europe and the U.S., but I believe Western gold observers tend to overlook demand-stoking factors of a more local nature. Excessive rates of economic growth in the East will tend to erode a saver's purchasing power just as surely as the currency impacts of easy monetary policy and bailout boondoggles will do in the West. Wherever one encounters negative real rates of return on cash, there too shall one find a powerful incentive for individuals to look to gold. India's real deposit rate for 2011 is forecast to be more sharply negative than that in the United States, and China remains in negative territory as well despite concerted efforts to apply the brakes to growth.
From that improving picture of what motivates individuals in the East to purchase gold, one must then apply the powerful multiplier effects present in the strong demographic trends unfolding in key markets like China and India. As routinely as these factors are weighed in forecasting bullish demand trends for industrial commodities, the extent to which they are overlooked by those offering bearish outlooks for gold strikes this Fool as a curious phenomenon. Sure, China will require plenty of copper and industrial commodities to build cities and related infrastructure for its rapidly urbanizing population, but among the future buyers of gold in China one must adequately consider the "200 million affluent and middle-income consumers" that KPMG China estimates "will emerge in China's smaller cities in the next decade." Another 60 million such consumers (and savers) are expected to crop up within China's top-tier cities during the same time frame.
Per-capita demand for gold in China has been increasing at an accelerating rate in recent years, and the WGC considers that "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." As a result, the WGC concludes: "We believe that Chinese gold demand could double within the next decade. However, given the recent momentum in Chinese gold demand, we would not be surprised to see this result achieved in a shorter time frame."
East versus West
Even before applying those bullish economic and demographic forecasts that portend further increases in gold demand in the East, a present-day snapshot already reveals the relatively minor role that U.S. and European demand plays within the global market. Consumer demand for gold in India reached 291.8 tons during the first quarter of 2011, while China chipped in another 233.8 tons of demand (up 11% over the prior-year mark). Together, those two nations account for 57% of total worldwide consumer demand for gold, and more than 12 times the scale of demand originating in the United States!
So before investors mistakenly interpret profit-taking by gold investors like George Soros as heralding a looming end to this secular bull market for gold, I ask that Fools pause to consider WGC managing director of investment Marcus Grubb's observation of "eastern demand picking up any of the gold coming out of the hands of western investors," and the clear corroboration of that trend by gold traders last January. And to protect oneself from viewing gold through a lens that is excessively focused upon Western market forces, Grubb offers the following reminder:
While of course the demand for gold has been high and continues to be very high in Western markets, because of economic fears and concerns about deficits, concerns about future inflation, currency debasement ... I do think that the focus on that in Western countries does detract from the fact that gold is part of the super cycle in commodities and it is being invested in and purchased in Asia at a very rapid rate as wealth increases and population demographics increase.
While near-term swings in the gold price can prove both sudden and pronounced, I maintain that the dynamics contemplated above imply a steadily rising floor beneath long-term gold prices that will carry the metal comfortably through my target of $2,000 per ounce. I continue to recommend a multitiered approach to gold exposure that might resemble the following: a physical bullion proxy such as the Sprott Physical Gold Trust (NYSE: PHYS ) , a high-quality growth vehicle such as Goldcorp (NYSE: GG ) or Yamana Gold (NYSE: AUY ) , a selection of compelling turnaround stories such as Gammon Gold (NYSE: GRS ) and Northgate Minerals (AMEX: NXG ) , and some high-octane upside potential from a small-scale producer such as Brigus Gold (AMEX: BRD ) .
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