Illustration by Bloomberg View

Glittering Gold Need Not Set Off a Panic Over Inflation: View

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May 30 (Bloomberg) -- Have you been asked about gold lately? Has someone tried to explain to you that the precious metal’s 27 percent increase in dollar terms during the past year signals ominous things? Runaway inflation... economic panic... infinite instability...

Well, instead of wasting your breath, or giving up and walking away, direct the concerned party to a corner of the report released this month by the World Gold Council, the gold-mining industry’s main trade group.

Buried amid the standard reportese is a statistical review of worldwide gold demand in 2011’s first quarter. The data show that gold’s ascent is being driven by extraordinary demand from India and China, where rising prosperity is making it easier for millions of people to buy gold in all its forms, particularly jewelry.

The WGC estimates that Indian households own more than 18,000 metric tons of gold, the largest holding on the planet. (By contrast, U.S. official gold reserves total about 8,100 metric tons.) Indian consumers aren’t done buying. In this year’s first quarter, they purchased an additional 206 tons of gold jewelry and 85 tons of gold bars and coins. China’s appetite is growing rapidly and could soon overtake India’s.

Or come at it another way: Strip out Chinese and Indian purchases, and the rest of the world isn’t nearly so vibrant. Some new buyers have shown up; some prior speculators are cashing out.

Price Prediction

This is not the company line. Earlier this month, Sun Zhaoxue, the president of China National Gold Group Corp., the country’s largest gold mine, predicted that gold prices will stay high because of the dollar’s depreciation and "intensifying geopolitical risks." His measured version of the safe-refuge thesis can be heard in much shriller tones on late-night advertisements for gold coins.

Yes, price surges for gold don’t always reflect genuine fears and the need for disaster-proof investments.

And, yes, gold’s price may continue to climb this year. A recent Bloomberg News survey of 31 analysts, investors and gold-mine operators found respondents, on average, predicting a year-end price of $1,750 an ounce, up significantly from recent levels of about $1,530.

If such a rise occurs, however, it’s likely to reflect normal public demand for a shiny commodity, rather than a far-sighted warning to the world’s central bankers.