“I found a fascinating "White Paper" published by GMO. (Bhartia and Seto)

“With all of the talk of gold ETFs, they only comprise 7.5% of gold purchases, while Central Banks in total have actually been net sellers (despite China and India being large buyers). Meanwhile, emerging market retail purchases amount to 77% of purchases.

“I do not believe it is a stretch to draw the following implications from these numbers.

“1) Gold and Gold stocks may be a better way of playing the rise of the middle class (and wealth in general) in emerging markets than consumer discretionary stocks, where there are always the dangers associated with stocks (legal, political, mismanagement, inflation etc.).

“2) By the same token, a hard landing in China or India could do serious damage to the aforementioned."

Eoin Treacy's view Thank you for this interesting report and your additional insights. Let us differentiate between the primary reasons for buying gold:

It is as a hedge against a loss of purchasing power. In the West, this is what we are most familiar with because we are contending with lower standards of living, weak currencies, high debt and a loss of confidence in the ability of government to do anything constructive.

People also purchase gold because it is one of the classic trappings of wealth and success. As a progressively more wealthy middle class evolves, the nouveau riche, often vie for a limited supply of expensive trinkets. Property, cars, boats, shoes, bags, jewellery and gold all fall into this category.

While some people hold gold as an investment, there is a significant cohort that appreciates gold's tactile qualities. Solidity and immutability offer comfort. The way gold heats up the longer you hold it simulates intimacy on an unconscious level. I've met more than a few investors that have fallen in love with their gold holdings.

Chinese and Indian demand for gold taps into these three distinct demand drivers as well as having a cultural affinity for the metal. Both countries have battled with inflation over the last decade. On average economic growth has outpaced inflation but the effect has not been evenly spread out. Both countries suffer from corruption and fickle law enforcement. Gold demand as a hedge against a loss of purchasing power or as a “rainy day” investment is equally valid in Asia as it is in the West. I see no contradiction in Asia representing the bulk of demand for gold and the metal acting as a hedge against inflation.

Regarding your points above, I agree gold may act as a proxy for the rise of the global middle class, at least for a while. However, it should also be noted that gold shares face all the same legal, political and management concerns as any other company. A deep recession in either India or China may have a negative impact on gold prices. I think it would depend on the causes and whether it was associated with higher inflation. As the largest gold producer, anything that happens to question Chinese mine productivity may have a bullish effect.