China demand may rescue Asia gold market

China demand may rescue Asia gold market

TOKYO (Reuters): Asian demand for gold has been lackluster this year as slowing economies have hurt jewelry offtake and industrial use, although China may revive the market as it liberalizes the domestic gold trade, analysts said on Tuesday.

Gold demand in 10 countries in east and southeast Asia for calendar 2001 will likely exceed last year's 815 tons because an expected rise in Chinese demand will offset declines elsewhere, said Itsuo Toshima, a regional director of the gold mining body, the World Gold Council (WGC).

"It's too early to project how big Chinese gold demand will be. But I expect their demand to expand because China will likely start implementing programs to liberalizing its gold market by the end of the year," Toshima said in an interview.

The Council, a gold promotion organization funded by major mining companies, has acted as an adviser to China over its gold market reform and has proposed deregulation steps to the government, including allowing individuals to buy gold investment products.

It estimates Chinese gold demand reached 207.5 tons in calendar 2000, up from 205 tons in 1999.

Toshima said China's gold demand could grow to 800 tons in the next 10 years if its market is liberalized, just like India's gold demand has quadrupled to over 800 tons since the country deregulated its gold market in early 1990s.

At present, all gold produced in China must be sold to the central People's Bank of China. Individuals are banned from gold investment.

Traders agree China has the potential to contribute to Asian demand this year, although they were doubtful about growth in other markets.

In Japan, gold demand for calendar 2001 is expected to shrink from some 200 tons estimated for last year because consumers are reducing spending on luxury goods such as jewelry amid economic gloom, traders said.

Use of gold by Japan's semiconductor makers was also declining as manufacturers curb production in the face of slowing sales and rising inventories.

"I'm afraid Japanese gold demand this year might slip by 10-20 percent from last year," one Japanese trader said.

Latest data from Japan's Finance Ministry shows imports in the January-March quarter of this year totaled 6.82 tons, down from 12.54 tons a year earlier.

Demand for gold bars and other investment tools has been poor this year as Japan grapples with deflation, which has reduced the need for gold -- traditionally a hedge against inflation.

"In recent months, fresh buying of gold bars was overwhelmed by profit-taking," another Japanese trader said. Holders of gold bars were taking advantage of the yen's weaker trend against the dollar, which contributed to higher yen-denominated gold prices.

Traders said the latest rally in world gold prices had accelerated sales of gold bars by Japanese investors.

"U.S. funds were said to be shifting funds to gold from the equity and debt markets. But as far as Japan is concerned, I don't believe such safe-haven buys have occurred," another Japanese trader said.

But Japanese investors may turn from net sellers to net buyers of gold bars if they regain confidence about the upside potential for prices, he said.

"World gold prices appear to have bottomed out and may have entered an uptrend. Investors may return as buyers," he said.

Gold was fixed at $291.25 an ounce in London on Monday, its highest since June 13, 2000. It was a bounce after hitting a $253.75 spot low in February.