Central banks – both from developed and developing countries – have showed more interest in gold recently given the uncertainty over the future of the international monetary system. China, in particular, has thrown its weight behind gold.

In 2010, the Chinese central bank moved to liberalize its local gold market and open its doors to local individual investors. This allowed Chinese banks to trade gold bullion on the global market and advertise gold-related investment products for locals.

“China demand appears to have risen more than five-fold in 2010 from 2009, and is set to make further strong gains over 2011,” said Citigroup global metals researcher David Thurtell. Among other factors, China’s measures to curb price increases in its property market have helped make gold a more attractive option.

The World Gold Council (WGC) estimates that China’s investment-driven consumption of gold nearly doubled to 150 tons last year from 80.5 tons in 2009. Albert Cheng, managing director of the Far East region at WGC, recently project that China’s gold consumption is likely to double in the next 10 years.

The jump in Chinese demand could even see China – currently the 2nd largest consumer of gold in the world – replace India as the world’s largest gold consumer. Dominic Schnider, head of commodities research at UBS wealth management, said, “Chinese demand might be similar to India, which, by providing a type of base demand on top of financial demand from the developed world, can drive prices.”

This trend began back in 2003, when the government of China began an aggressive campaign to secure resources of gold. Since that time, the People’s Bank of China has added 21.2 million ounces to the country’s gold holdings. China now has the fifth largest national gold reserve, with over 1,054 tons in reserves.

While boosting reserves, the Chinese government has also been deregulating the gold mining industry and inviting foreign investment for the development of domestic resources. As a result, China is now the world’s largest gold producer, with output increasing 70% in the past decade.

With the new Chinese government measures to encourage its citizens (all 1.3 billion of them) to own gold, we could continue to see strong continuing demand from the country.

All owners of gold could benefit from this trend, as rising individual demand globally could presage higher prices for the yellow metal.

(Sources: “Gold – More Than A Twinkle in the Eye,” The Business Times, January 3, 2011; “China Gold Demand Soars,” WealthDaily, December 10, 2010)