Chinese dig deep to join the gold rush

• Sellers enjoy a golden period as demand soars
• China named as the world's biggest gold consumer

Counter staff at Chinese gold retailer Caibai in Beijing Photograph: Dan Chung

The assistant pushed the red velvet sacks across the counter discreetly. The customer quickly slipped them into her bag. With a brief, nervous look around, she walked briskly from the shop, already clutching her car keys.

Few people feel comfortable lugging around a kilo of pure gold bars. But that doesn't stop Chinese shoppers from thronging to Caibai, the number one place for buying the precious metal. The Beijing store's 5,000 daily customers are at the forefront of a new gold rush.

Since 2007, when South Africa fell behind, China has been the world's biggest gold producer. Now the World Gold Council and industry analysts believe it may have overtaken India – for centuries the dominant buyer – to become the biggest consumer too. The China Gold Association estimated demand would exceed 450 tonnes last year, up from 395.6 tonnes in 2008 (the actual figures are not yet available).

The country's rising consumption both drives, and is fuelled by, the increase in global gold prices. Last January, an ounce of gold cost about $750 (£550). But on 3 December, it hit a record high of just over $1,226. Since then it has slid to $1,095, but is still far above its level in the past few years.

Much of the gain is recent. In the third quarter of 2009, gold demand on the mainland soared 12% year-on-year to a record high of 120.2 tonnes. Internationally, demand for jewellery was down 30%, but in China it rose 8% to 93.5 tonnes while retail investment rose a staggering 30% to a record 26.8 tonnes.

Albert Cheng, Far East managing director for the World Gold Council, points out this is partly because China's continued economic growth is enabling consumers to indulge in a favourite luxury. "The Chinese have a deep affinity to gold which dates back thousand of years," he says. "No marriage will be ideal if the bride does not receive gold jewellery."

China is hardly the only culture to prize gold. But the council, which is funded by mining companies, has spotted something distinctive about its consumers. In India, Turkey and the Middle East, buyers have been deterred by the soaring cost of the metal. In China, however, it noted in a recent report, "the rising gold price is seen as a positive factor – consumers like to buy into a rising price".

That is why, even on a weekday morning, the shop floor at Caibai is rammed. On busy days, 10,000 people pass through its doors. This store is to gold what Marks & Spencer is to underwear in Britain: not the most glamorous source, nor the cheapest, but the tried and trusted favourite. In 2008, the company sold gold worth 3.5bn yuan (£316m). In the first 11 months of 2009, it sold 4.1bn yuan, and the lead up to the Chinese new year – which falls next month – is always a busy period.

Customers are picking over delicately wrought earrings and gazing covetously at huge, embellished collars. Increasing prosperity is enabling middle-class consumers to treat themselves; Liu Hongxia, leaving the store with a newly acquired bangle, recalls splashing her first pay packet on a ring for herself and earrings for her mother. No wonder she feels nostalgic – that was more than a decade ago. "Now the price is three times higher," she said ruefully.

Nearby shelves are stacked with solid gold statuettes: busts of Chairman Mao, frolicking labradors, soaring eagles and majestic galleons. Laughing Buddhas sit beside writhing dragons. Every item is labelled by weight, and charged according to the metal's price on the day of sale.

But a glass case close to the entrance – and closer to security guards – offers a clue to the hottest draw. Inside sits a 50kg, 24-carat bar: so big, it looks as though it should be made of chocolate and covered in foil. Upstairs, shoppers are buying smaller versions. To them, gold is not just a lavish gift or a reward for hard work, but a hedge against uncertainty and a potential money maker.

"This is the first time I've invested in it," said Ji Junqing, a 38-year-old accountant, hugging her treasure-filled handbag as she spoke. "I used the stock market before, but I think this is more stable. I've been reading about it in all the newspapers and magazines, so I'm putting in about 20% of my assets.

"Whether it's a short- or long-term move depends on how it fares, but I believe the price will keep going up. When you buy gold you see real gold – when you buy something else it's simulated."

Shares are too risky, agree other buyers, stung by last year's freefall of Chinese stocks. Housing is too expensive. They fear inflation could whittle away the value of cash holdings.

Gold looks attractive to the government too. Last year, Beijing revealed it had been buying gold since 2003, increasing its holdings from 600 to 1,054 tonnes. So far it has bought domestically, but its foreign exchange reserves – the world's largest, at $2.27tn – are largely invested in US government bonds. Given concerns about the US economy, many expect China to buy gold internationally to diversify its assets, as other central banks have done recently, driving up the price. Production is on the increase as well: the China Gold Association predicted it would hit a record 310 tonnes in 2009, up from 282 tonnes the previous year.

Newspapers report that coal bosses, driven out of business by a nationalisation campaign, are caught in bidding wars for gold mines instead. "People are running around with bags of cash to buy the right to exploit gold as soon as possible," Liu Jun, a former coal boss from Zhejiang, told the Xinmin Evening Post.

Some of these mines have yet to produce gold. But many buyers do not seem to mind: they are simply flipping the mines, reselling them as soon as the price goes up. "It makes money quicker than real mining," said another former coal boss.

Like Caibai's shoppers, they see gold not just as an investment haven but as an irresistibly accumulating asset. Yet while some experts predict a long-term rise in the international price, others fear prices could fall sharply. In 1999, at its lowest, gold was worth just $252.8 an ounce. No one expects it to plummet to that level, or to drop tomorrow. But it may not always look so glittering to today's eager Chinese buyers.