China will probably overtake the U.S. as the world's second-biggest gold producer this year and may end South Africa's century-long dominance within five years, the country's industry association said.

Production may rise 8 percent to 260 metric tons from 240.1 tons in 2006, Hou Huimin, deputy head of the China Gold Association, said in an interview in Shanghai yesterday. U.S. production should be about 250 tons this year, he added.

China's gold output has almost doubled in six years as companies, including Zhongjin Gold Corp. and Zijin Mining Group Co., benefit from private investment. The gold rush will help to meet surging domestic demand and may slow imports of the metal which traded at a 27-year high of $811.20 an ounce yesterday.

"There's actually a good chance that Chinese gold mine production will surpass South Africa's in 2007," Philip Klapwijk, executive chairman of London-based researcher GFMS Ltd., said today by e-mail. "It's going to be a close call."

South Africa's gold production has declined by almost a third since 2002 as workers dig as much as two miles underground for metal in aging mines. Production in the first six months of this year was 134 tons, according to GFMS.

"Given the trend of declining gold production in South Africa and rising output here in China, the country should be able to become the world's No. 1 producer in less than 5 years' time," Hou said.

The China Gold Association is an official industry body representing 358 miners, refiners, jewelers, banks and brokerages. It also advises the central bank on gold policy.

Companies Prosper

China boosted output of the precious metal by 13.1 percent to 191.5 tons in January to September, from a year earlier, the government's top planning body, the National Development and Reform Commission, said in a statement on its Web site Oct. 30.

Profit at China's gold mining companies gained 40 percent in the first half on rising output and prices, according to the gold association. The industry, once entirely dependent on state investment, is centered in eastern provinces, especially Shandong, which has about 40 percent of proven reserves.

Zijin Mining, which runs the country's biggest gold mine, increased profit by 81 percent in the first six months of this year, the company said Aug. 16. It expects output in the second half to rise to 29 tons from 22.3 tons in the first six months.

Zhongjin Gold, China's largest publicly traded producer of the metal, plans to sell as many as 130 million shares to buy mines from its parent, China Gold Group, and to raise funds to boost its gold reserves and output.

China Demand

Gold could rise to a record above $850 an ounce next year on strong demand and tensions between the U.S. and Iran, the gold association's Hou said. "There should be more potential for prices to go up in the long term."

Bullion, which climbed 27 percent so far this year, is heading for its seventh straight annual gain as the dollar's slump to the all-time low against the euro and crude oil's rally to above $96 a barrel have boosted its appeal as an alternative investment and hedge against inflation.

Gold for immediate delivery gained as much as $2.70, or 0.3 percent, to $809.20 an ounce, and traded at $808.70 at 12:19 p.m. Shanghai time today.

China's demand is expected to rise "significantly" this year from 350 tons in 2006, Hou said.

"The Chinese have always favored gold as a store of value," he said. "With rising disposable income in China and budding global inflation, people increasingly look to gold as an investment."

China will probably be the second-largest gold market by volume this year, overtaking the U.S. and clinching the No. 2 spot after India, Klapwijk told a conference in Seoul Nov. 1.