China officially overtook India as the world's largest consumer of gold in 2013, according to the World Gold Council (WGC), in a year that saw overall demand for bullion slump 15 percent owing to heavy exchange traded fund (ETF) selling.
Chinese consumer demand – which includes jewelry, bars and coins – rose 32 percent on year to a record 1,066 tonnes in 2013. Indian consumers, by comparison, bought 975 tonnes – a 13 percent rise from the previous year, the latest WGC Gold Demand Trends report published on Tuesday showed. Globally, consumer demand climbed 21 percent on year, totaling 3,864 tonnes.
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"Demand for gold in China set a remarkable new record…The impact on the Chinese gold industry of the extraordinary growth in 2013 demand has been marked, with significant growth in both manufacturing and retail network capacity," the WGC, an industry body representing gold miners, wrote.
While data from recent quarters has shown China extending its lead as the top gold consumer, data for the full year confirms this.
A steep drop in gold prices during the April-June quarter triggered a buying spree among mainland consumers – and it was that quarter which had the strongest impact on the annual demand numbers. The average price of gold for the year was $1,411 per ounce, down 15 percent on 2012. However, with prices currently stabilizing, Chinese demand is expected to establish a steadier pace, the WGC said.
In India, higher import duties, strict import quotas and restrictions on gold-related lending and coin sales limited supply on the domestic market. Over the past two years, the government has implemented a slew of measures to curb demand for gold – its second-biggest import after oil – as a means of reducing the country's large current account deficit.
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There may be scope to ease the restrictions this year, however, as the deficit narrows. Finance Minister P. Chidambaram after presenting the interim budget in parliament on Monday said the government would look into relaxing the curbs, Reuters reported.
Overall demand falls in 2013
Rampant outflows from bullion-backed ETFs and lower central bank buying offset robust consumer demand in 2013, resulting in a decline in overall demand.
Gold demand was 15 percent lower than 2012, with a full year total of 3,756 tonnes.
Net outflows out of ETFs amounted to 881 tonnes as investors fled the yellow metal on concerns about the Federal Reserve scaling back its monetary stimulus and a lack of inflationary pressures.
"The main feature of gold investment throughout 2013 was the contrast between ETFs, which acted as a source of supply to the market as sizable institutional positions were sold, and demand for bars and coins, which surged to an all-time high," the WGC said.
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"This pattern was repeated during the fourth quarter of the year, although the demand for small bars slowed following the exceptional pace of demand in the first three quarters. The expectation is for this flow to taper off as the market is pared back to a core of strategic holdings following the liquidation of more tactical positions," it added. There was a net outflow from ETFs of 180 tonnes during the fourth quarter.
Meanwhile, central banks considerably slowed their pace of purchases to 369 tonnes – down 32 percent on year – due to the heightened volatility of gold and a slower rate of foreign reserve accumulation.
"The annual total is in line with our widely-discussed expectations and, although 32 percent lower than the previous year, is a healthy outcome – particularly in light of 2012 being the highest level of demand for almost 50 years," the WGC said.
—By CNBC's Ansuya Harjani. Follow her on Twitter: @Ansuya_H