Demand for gold rising again on new demand out of China and fear of euro prospects

Many small investors in China have turned to gold as high inflation threatens to erode wealth in the world's second-largest economy, leading to small gold exchanges springing up all over the country.

The influx of retail investors promises to not only boost Chinese gold demand, but also increase its volatility.

The country's property market, once a popular choice for investors, has suffered from a government crackdown on speculation.

The 'investment' in Chinese property has been largely speculative like the earlier spree in the retail stock market, and the need to speculate may now be shifting to gold.

Emerging local exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery.

Some exchanges make it difficult and expensive to take delivery. The Zhejiang exchange, for example, charges 17 yuan per gram for physical gold delivery.

"Who would want to take physical gold? People just want to speculate on price moves and make a profit," said a customer service representative at the exchange who gave her last name as Chen, reported Reuters.

The legitimacy of these new exchanges is also debatable. Some bourses were approved as bulk material wholesale markets and others got licenses for conducting e-commerce.

Chinese nationals are not allowed to invest in overseas financial markets except through products offered by institutions under the scheme of Qualified Domestic Institutional Investor.

But a rampant underground gold market has developed to sidestep rigid regulation and feed demand from Chinese investors who want exposure to foreign markets.

This strong Asian demand, a rise in gold ETF purchases and the Eurozone financial crisis are all coming together to put a stronger focus on precious metals with the VIX fear index rising again.

With Europe teetering on a knife edge some see gold resuming its role as the custodian of safe wealth.

Gold and silver have received a serious price boost as the Eurozone leaders still seem to be finding it impossible to agree on moves to try and prevent what could develop into a global economic meltdown.

Gold prices firmed throughout late New York trading yesterday where it breached the US$1,700 / ounce level. The firm tone prevailed during Asian trading hours this morning, when gold traded to a high of around $1720 before easing slightly.

Behind the move higher has been a surge in purchases of gold ETFs as well as ongoing strong demand for physical bars. The ETFs have seen 16.5 tonnes of new gold buying over the last 2 days which is driving the price upwards. It will be interesting to see if the futures traders on COMEX reverse their recent thinking by following suit and drive this market significantly higher.

The speed and nature of the gold price rise seems to suggest it is rallying during bouts of heightened economic crisis. The VIX Index is firmer underscoring market concerns, while more worryingly Italian 10 year bonds are nudging the 6% level (Greece received its initial bail-out when theirs breached 7% - currently at 25%).

In short - gold is back, say its supporters.

The financial markets are giving a very clear signal saying that they doubt that the 27 EU nations will reach an accord on policies to resolve sovereign debt while stimulating economic growth. The market is looking for 'specifics' and not 'generalities'. There is a sense that investors have heard too much talk and they are starting to worry about both inaction and inflation.

Gold can thrive on the ‘fear factor'.  And that 'fear' is being supplied by Eurozone policy delays and uncertainty.

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