Gold values driven by Indian and Chinese inflation, not global recession

Unlike the popular assumption, the current Gold rally is not fuelled by the European debt crisis or global slowdown but strong Indian and Chinese demand. Demand from professional investors has remained mostly unchanged, as shown by holdings in ETF's and futures contracts. Gold holdings in SPDR GLD, the world’s largest gold ETF, has actually declined from 1280 tonnes to 1232 tonnes. The real demand growth for gold has largely come from consumers in China and India who are buying gold to hedge the high inflation prevalent in their countries, says Clyde Russell, a Reuters market analyst. India’s Gold demand jumped by 38% in Q2, 2011 whereas Chinese demand rose 25%. This coincides with the Indian inflation which has been above 9% for most part of the year and the record-high Chinese inflation of 6.5%. So, as long as inflation in both countries and threats of a global economic slowdown remain, there is no reason to expect a decline in gold prices. However, investors should keep an eye on the inflation rates of India and China as any decrease has a huge possibility to cause a slump in gold prices.

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