China's Gold Investors Undeterred by High Prices

BEIJING/SHANGHAI (Reuters) - Gold might be a luxury most can live without when times are hard, but for cautious investors in China, the world's top producer and consumer of bullion, it has become a matter of necessity.

Jewelry sales might take a hit in China after prices hit a record high of $1,043.45 an ounce on Tuesday, but amid ongoing economic uncertainty, many in the financial community still prefer bullion to bonds, analysts said in comments made before the record was struck.

The government itself -- also looking for a safe haven for its foreign currency reserves -- is also likely to increase its gold holdings, which now officially stand at 1,054 metric tons.

"Consumption in China is expected to rise, as it is supported by expectations of inflation, and I also believe the government will increase its reserves," Yao Haiqiao, president of Longgold Asset Management, said.

Only around 1.6 percent of China's forex reserves is held in gold, and that figure is expected to rise, Sun Zhaoxue, chairman of the China Gold Association, said earlier this year.

World gold prices have broken the $1,020 per ounce barrier for the first time since March 2008 as investors seek a safe haven from uncertainty about the world economy and the dollar. While some have warned the price might not be sustainable, Chinese buyers are still expected to remain active.

"Consumers are sensitive about the prices, so rising gold prices will definitely hit purchases in India and China. We have seen a rapid drop in India's jewelry consumption in the first half so a similar story could be happening in China," said Zoe Wang, analyst with Shanghai CIFCO Futures.

"But in terms of investment, purchases are rising, as more people are using gold as a hedging tool. Such purchases will obviously increase in China."

China is already the world's biggest gold producer, and in the first half of this year, consumption of the precious metal also became the highest in the world, overtaking India.

Albert Cheng, Far East managing director at the World Gold Council, said Chinese gold purchases for investment reached a record high of 70 metric tons in 2008.

With jewelry sales expected to fall -- even in the biggest market of China, the only one to show any growth in 2008 -- it is investment purchases that continue to drive up prices.

"The Chinese buy more gold bars in banks while Indians buy more jewelry," said Longgold's Yao.

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