Relative value

Recall the excessive (read: tulip-mania levels of reality bending) prices Japanese investors were willing to pay for U.S. real estate during its boom years. Note how the story for gold demand is revolving around several narratives, whilst never seriously discussing the possibility of a collapse like every other commodity market whose values have appreciated by 100% or more. Name ONE, dear reader, that has achieved this type of price sustainability since 1972, in real or nominal currency.

There is none.

(From the WSJ)
Chinese investors are snapping up gold bars and coins, buying more than ever before in the first quarter of 2011 and overtaking Indian buyers as the world's biggest purchasers of the metal.

China's investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India's modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India's 23%.

The report underscores the rising appetite for gold among the growing middle-class in China. Fears of the country's soaring inflation, as well as a search for new investments, is luring investors to gold, and marketing of the precious metal has also increased in recent months.

"I think people will be surprised by the strength in the Chinese demand, but we think this is a trend that is set to continue," said Eily Ong, an investment research manager at the gold council.

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Historically, India has been the largest investment market for gold. In 2007, just before investing in gold began to take off globally, India's physical gold demand accounted for 61% of the world's total. China's was 9%. In terms of total consumer demand, which also included jewelry, India is still a bigger consumer of gold than China, taking in 291.8 tons in the first quarter, compared with China's 233.8 tons.

Still, the voracious appetite shown by Chinese buyers prompted the gold council to increase its forecast for the nation's demand.

"In March 2010, we predicted that gold demand in China would double by 2020; however, we believe that this doubling may in fact be achieved sooner," said Albert Cheng, the World Gold Council 's managing director for the Far East. "Increasing prosperity in the world's most populous country coupled with their high affinity for gold will serve to drive demand in the long term."