IT's taken all of recorded history, but this year China finally looks set to overtake India as the world's number one gold consumer. It may struggle to hold that position in the short-term, as the one-off factors that have slowed India's gold demand fade, but in the long term China's rapidly growing economy and investment demand could see it add gold to the long list of commodities where it is the world's largest buyer. The story this year is mostly about falling demand in India - down by more than half in the nine months to end-September, according to the World Gold Council. Gold's record-breaking run, that has lifted prices 28 percent this year in rupee terms, saw Indians cashing in jewelry and gold bars, while the weakest monsoon in nearly 40 years knocked incomes in the rural sector that is the bedrock of consumer purchases. In contrast, China's demand is up 8 percent in the same period. Metals consultancy GFMS sees China's gold demand at 432 tons this year, and India's at 422 tons. A severe monsoon and record prices were behind the drop in Indian consumption this year, while loose liquidity in China has driven a buying spree across a range of resources. These factors could easily reverse, allowing India's broad base of jewelry demand to once again offset lagging investment demand. “China may temporarily surpass India as the world's largest gold consumer but it's questionable whether that can be sustained,” said Xiao Minjie, senior economist at Daiwa Institute of Research in Tokyo. India's growth rate is catching up with that of China, and appears to be entering the early stages of the high-growth era China saw back in the 1992-93, giving consumers more purchasing power. The extent of the fall in purchases could be building pent up demand that may emerge at a big correction, analysts said. “This year was an exception. Next year may be better provided prices are stable and there is no drought again,” said Bhargav Vaidya, a bullion analyst in Mumbai. Dealers and analysts in India also said the drastic fall in demand must not be taken to mean India's appetite for gold fell to the same extent, because a lot of consumers recycled old jewelry to buy new jewelry, while others sold gold bars to profit from high gold prices. “India's total demand may have fallen by 5 to 10 percent only,” when taking into account recycled gold, said Nayan Pansare, an analyst who works for jewelry exporters. When Indians get used to new price levels, their traditional affection for gold may revive consumption as there is a huge latent demand in India that could explode if prices make a significant correction, GFMS's executive chairman Philip Klapwijk said at the Shanghai conference. In the long run, China may still pip India as economic and social indicators point to its greater affluence and spending capacity. In the last decade India's gold imports have remained capped under 800 tons despite a rising population and per capita income. Analysts said gold demand is failing to rise much as urban Indians are buying low-weight gold items and diamonds and rural Indians are taking to luxury goods such as automobiles and televisions.
