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China's gold demand seen getting a boost if stock rally fades

[BEIJING] China's gold demand may rise if the country's stock market reverses its rally, according to the World Gold Council.

Demand in the world's largest user may rise as high as 1,000 metric tons, a nearly 3 per cent increase from last year, Roland Wang, China director of the London-based group, told reporters in Shanghai on Wednesday. Consumption sank in the first quarter as investors flocked to the Shanghai Composite Index's 16 per cent gain while bullion prices stalled.

"We will be more confident to say China's demand in 2015 will beat 2014 if we see an end of the stock market rally and a start of a gold price surge," Mr Wang said. "Chinese investors usually seek asset tools to prevent risks in stock markets and chase rallies in gold." Rising demand in China may help support prices that have fallen for three quarters. Global investors have lost their appetite for bullion amid prospects for rising US interest rates, which may subdue prices and curb gold's allure.

Gold of 99.99 per cent purity was at 235 yuan a gram (S$1,581 an ounce) on the Shanghai Gold Exchange, down 2.3 per cent this year as China's world-beating stock market and slowing economic growth hurt demand from consumers and investors. Bullion for immediate delivery fell 0.1 per cent to US$1,177.48 an ounce at 10:44 am in London, according to Bloomberg generic pricing.

The value of Chinese shares has begun to pull back after jumping by as much as US$6.8 trillion in the last year, fueled by record margin debt and novice investors.

Stock Plunge The Shanghai Composite Index plunged 13 percent last week, the fastest pace among global equity gauges and the most since 2008, amid concern valuations were unsustainable. About US$1.3 trillion was wiped off mainland Chinese equities last week, more than the value of Australia's entire stock market.

China was the world's biggest gold buyer last year, the WGC said in its May report. The nation bought 973.6 tons last year, more than India's 811.1 tons, according to the council. Chinese demand in the first quarter fell 7 per cent to 272.9 tons as a 10 per cent percent drop in jewelry purchases outweighed the 3 per cent gain in demand for bars and coins.

Global investors cut holdings in bullion-backed exchange- traded products this year to the lowest since 2009 as US equities reached a record and an index of Chinese stocks more than doubled in 12 months.