Record Prices Spawn New Wave of China Gold Bugs By cnbc.com | Monday, 29 Aug
2011 | 4:56 AM ET
Record gold prices, rather than denting China's enthusiasm
for bullion, have emboldened investors to plough more money
into gold bars and riskier bullion-based derivatives.
August
is traditionally a slow month for Chinese jewellers, but
many shops in Shanghai visited by Reuters reported surprisingly
solid gold sales over the last few weeks, with shoppers
unfazed by gold's [XAU= 1786.60 -0.65 (-0.04%) ] stellar
price gains over the past few months.
"The surge in prices has sparked another gold-buying
craze. The 50 gram and 100 gram gold bars were selling like
hot cakes," said Ms. Liu, a store manager at Shanghai's
major jeweller Lao Feng Xiang [600612.SS 34.20 -0.51 (-1.47%)
], who said gold sales this month were up at least 30 percent
from a year ago.
The attitude of Chinese consumers — expected to soon
overtake Indians as the world's top buyers of gold —
will be an important influence on longer-term trends.
Demand from the world's most populous country, which is
adding hundreds of thousands of people to the ranks of affluent
and middle-income consumers every year, implies that the
long-term price floor for gold is set for a steady increase.
Buying on Dips
That demand may also help smooth out temporary drops in
prices.
Spot gold has come off its record highs of over $1,900 an
ounce hit last week, falling back to around $1,820 an ounce,
but such dips appear only to embolden consumers.
"Many Chinese investors and consumers see price corrections
as buying opportunities. The view that gold is an enduring
store of value is firmly rooted in Chinese cultural traditions,"
said Hou Xingqiang, a gold analyst at Jinrui Futures.
"Gold's rally over the past two years and the debt
worries in the West have only strengthened Chinese investors'
belief that they need to own the metal as an investment
asset."
There is no shortage of bulls on Wall Street forecasting
even higher gold prices, with J.P Morgan predicting at least
$2,500 an ounce by the end of the year.
Amid the gold frenzy, China's banks and brokerages have
been quick to offer paper gold investments to cash in on
the trend.
Trade sources at the Bank of China and Industrial and Commercial
Bank of China say demand for their gold-linked savings products
has soared, while a growing army of retail investors are
also eager to dive into the paper gold market.
Expectations that gold will extend its bull run have also
encouraged investors into the country's nascent gold derivatives
markets, such as the forward and futures contracts on the
Shanghai Gold Exchange (SGE) and Shanghai Futures Exchange.
Volumes for SGE's most popular gold forward contract hit
a record high of 350,670 grams in August — double
the volume in July.
"More investors are moving into paper gold because
of the lower capital costs. The prospect of making big and
quick bucks by betting on gold's ascent is beginning to
look like a fairly easy way to make money," said He
Wei, a gold analyst at Nanhua Futures.
Risky Bets
That could create other risks down the road, however, which
authorities are trying to fend off.
Investors buying gold swaps and forwards generally do so
on margin, putting up only a part of the money themselves
— potentially setting themselves up for much bigger
losses should the market turn sour.
Alarmed by the surge and worried that the giddying climb
in prices was encouraging excessive risk-taking, the SGE
raised margin requirements twice this month to 12 percent.
The explosive interest in gold investments has also led
investors to move to less mainstream derivative products
offered by over-the-counter exchanges that have sprung up
in recent years, bringing about new risks given the lower
margin requirements.
The Tianjin Precious Metals Exchange, established in 2010,
has seen a leap in demand for its swap contracts.
"The capital outlay for swap contracts is even lower
and it's becoming a popular investment instrument,"
said Han Qingsheng, a trading manager at Gold Day, a brokerage
for the Tianjin Precious Metals Exchange.
While the government is taking a somewhat cautious approach,
people's thirst for new investment products will no doubt
accelerate China's opening up of the gold sector —
a move long awaited by foreign banks.
In a sign that more changes are afoot, the China Banking
Regulatory Commission has already granted membership to
two foreign banks to trade gold futures on the Shanghai
Futures Exchange.
Industry watchers said changes on the horizon include night
trading for the SHFE's gold contracts and expanding the
list of domestic banks allowed to import gold — a
big step towards a full liberalisation of the sector.
"As physical demand increases, the government will
need to increase the supply avenues and some foreign banks
have an advantage because of links to overseas mints or
foreign trades," said a senior executive at foreign
bank.
"This would be the next step we're all waiting for."