Upsurge of purchasing gold cooling down in China

According to "Gold Demand Trends Q2 2012" recently published by the World Gold Council, the gold demand in China has dropped by seven percent in the second quarter of 2012.

Why will the gold demand in China, which is the world's main gold demand country, decline? How about the future trend of the gold? Whether will Chinese people keep the enthusiasm of buying gold?

The declining trend of gold demand will not continue in the future

"China"s gold demand was on the rise in the first half of the year," said Zhang Bingnan, secretary general of the China Gold Association.

"The second-quarter decline in gold demand was just an isolated phenomenon, and was caused by the exhaustion of investors" enthusiasm last year when gold prices rose sharply."

We believe that instead of continuing to decline, gold demand will rebound in the second half, and gold prices will resume their rally, Zhang said.

Chen Weixian, head of the WGC's Greater China investment department, said that in this context, gold performed as expected, acting as both a store of value and a source of liquidity. According to current data, gold"s supply and demand fundamentals remain unchanged.

The trends of the spot gold market show that gold prices tend to rise steadily after surpassing certain major marks.

Analysts noted that gold prices started falling around the end of the first quarter. International gold prices rose nearly 11 percent in January to 1,735.5 U.S. dollars per ounce, and fluctuated around 1,700 U.S. dollars per ounce in February. Gold prices dropped markedly in May to around 1,600 U.S. dollars per ounce. Now, they are beginning to rise steadily again.

Gold demand to increase in second half

China ranks sixth in the world with a total gold reserve of 1,054.1 tons. Although China"s gold demand has grown slower than last year, the WGC still forecasts the 2012 growth rate of the country"s gold demand at 10 percent.

Zhang predicts an increase in gold demand in the second half, but Chen believes that investors are cashing in amid the challenging economic climate, so there will be a temporary decline in gold demand.

However, history proves that gold can always serve as a safe haven for investors when a tail risk event such as the 1998 financial tsunami occurs.

Experts noted that gold demand in China will enter the traditional peak season in late August with a series of major Chinese festivals around the corner. Gold jewelry manufacturers will increase purchases of physical gold, which will drive gold prices further up.

In addition to festivals, favorable fundamentals for the gold after August will also help gold prices resume their rally. Furthermore, the increase in inflation expectations amid rising global food prices will rekindle the people"s enthusiasm for gold investment, experts predicted.