China's great leap into gold By Carolyn Cui
and James Areddy | April 02, 2008
GOLD-BUG fever is spreading.
From China to the Middle East, new ways to
invest in gold are rapidly popping up in developing countries.
It's transforming the market for one of mankind's
most venerable ways to sock away wealth.
The door is opening to a new class of investors
who previously wouldn't have had access to gold futures and
other tools.
Their rush to invest has helped fuel soaring
prices - gold crossed $US900 an ounce for a time in the past
week, and there are some calls for $US1000 - while adding
volatile new dynamics to the market.
On January 9, thousands of Chinese investors
jumped into the bullion market when the country's first gold
futures contract were launched. Futures are agreements to
buy or sell something at an agreed upon price in the future,
and are traditionally the domain of the pros, not individuals.
So far, it's been a bumpy road: the most active
June contract soared 6.3 per cent on its debut day, then tumbled
3.7 per cent on day two.
A slew of other new investments like these
are planned in markets from Dubai to Mumbai.
In India, the top lender, State Bank of India,
plans this year to launch an exchange traded fund that focuses
on gold - enabling investors to trade gold much like a regular
stock.
The World Gold Council, a London-based gold-mining
industry group, says it is seeking to roll out its first gold
ETF in Dubai this year, pending regulatory approval.
Last August, the Osaka Securities Exchange
in Japan rolled out a gold-linked bond aimed at smaller investors.
In one of the largest recent scandals, a Shanghai
trading firm, Liantai Gold Products, managed to find a way
to trade gold futures contracts overseas - circumventing Chinese
law - only to lose millions of dollars of its clients' money
in the process.
Liantai's total trading volume once reached
a remarkable 11.9 billion yuan ($1.86 billion), according
to court documents.
The case is pending.
Until recently, most buying and selling of
gold in China required lugging the metal between brokers and
haggling over prices.
As recently as a decade or so ago, when Chinese
tourists were first permitted to travel to Hong Kong in significant
numbers, they often descended first on gold shops in the former
British colony to stock up.
Only in 2002 did investors in China get the
ability to trade physical gold on the Shanghai Gold Exchange,
though individuals couldn't invest in actual bullion until
2005.
Even then, the opening was limited.
Today, however, some of the new products emerging
in China and elsewhere can be traded over the internet like
stocks.
The Shanghai Futures Exchange has warned that
the product is primarily meant for big trading firms or gold
consumers and producers, such as the nation's expanding gold-mining
and electronics industries.
Yuan Lianbo, who heads the gold trading desk
at Shandong Gold Group, one of the country's biggest gold
miners, says his company has already started trading the Shanghai
futures contract to hedge its price risks.
Just before trading began, the exchange tried
to limit speculation by individuals by more than tripling
the size of a single futures contract to one kilogram of gold
from 300 grams.
It also increased the amount of margin, or
collateral, that investors must post, to 9 per cent from 7
per cent of the value of the contract.
Still, while those moves lifted the minimum
investment to about $US2700, analysts say gold futures are
still affordable to many Chinese investors.
Among those clients signing up to trade the
gold contract through brokerage China International Futures,
"about 90 per cent are individual investors, most of
whom were moving assets from stocks after turning bearish
on the stock markets", says Lei Hongjun, deputy manager
of the firm's Ningbo branch. China's stock market shot up
97 per cent in 2007, but recently has tumbled 13 per cent
from its peak in October.
Of course, the new ability to trade gold in
China won't automatically result in higher prices, analysts
say.
But the new contract's movement will give
the rest of the world a better idea of China's appetite for
gold, which will be a key factor for gold prices.
Since 2003, Western investors have poured
billions of dollars into a related investment, the gold exchange-traded
fund.
Gold ETFs are pegged to the price of gold,
but trade like stocks.
The most active gold ETF, a Big Board-listed
fund called Street Tracks Gold Shares, now holds more of the
precious metal than the European Central Bank or China's central
bank. (ETF shares typically represent a chunk of physical
gold.)
Similar funds have been launched in Australia,
Britian, the US, South Africa, Mexico, Singapore and various
European countries.
Gold, often in the form of jewellery, holds
a special place in many Asian and Middle Eastern investors'
portfolios.
Increased wealth in these regions means more
people can afford to buy on impulse.
Chinese officials have suggested their country's
growing demand for commodities is a reason that its three
commodity futures exchanges should play a greater role in
global pricing.
Sun Zhaoxue, chairman of China Gold Association,
is quoted on the Shanghai Futures Exchange's website as saying
the new gold contract will "improve China's influence
on the global metals market and pave the way for China to
set the prices in the market".
Already, a copper-cathode contract traded
at the Shanghai Futures Exchange since 1999 rivals the importance
of the main copper benchmark on the 130-year-old London Metal
Exchange.
However, commodity benchmarks are tough to
create from scratch.