Chinese catching gold fever

Following their government, Chinese catching gold fever

By Wang Ying
China Daily, Beijing
Friday, May 29, 2009

Bitten by the gold bug, Chinese investors are now rushing to hoard the yellow metal as fears over the global recession deepen.

The increased sales of gold bars and gold jewelry in Shanghai, Beijing, Guangzhou, and other large cities are reflected in the precious metal's price surge on the Shanghai Gold Exchange (SGE), which trades in gold contracts for forward deliveries. Gold prices quoted on the SGE have increased by an average 6.74 percent in the past month to the current level of about 209 yuan a gram.

"Gold demand in China in the first quarter rose to 114 tons, up 2 percent over the same period last year, solely boosted by an increase in jewelry demand," according to the latest Gold Demand Trends report for the first quarter of 2009 published by the World Gold Council.

The report said global demand for gold rose 38 percent year-on-year to 1,016 tons, representing a 36 percent rise in value. China is the world's second largest gold consuming country after India.

Inspired by the increase in the government gold reserves, the more savvy investors are also buying shares of Chinese gold producers on the Shanghai Stock Exchange and the smaller Shenzhen Stock Exchange.

In late April, Hu Xiaolian, the head of China's foreign exchange agency, said China's gold reserves had risen 75.67 percent to 1,054 tons since 2003. Analysts said they expect the Chinese government would continue to raise its gold holdings as the renminbi becomes increasingly internationalized.

"China's gold reserves may serve as backing for the yuan as Beijing is stepping up the promotion of its use overseas," said Albert Cheng, director of the World Gold Council's Far East Division.

"As we know, in late April, the People's Bank of China announced its gold reserves had risen 454 tons since 2003 to 1,054 tons, a signal that the central bank is taking gold as a reliable hedge against financial uncertainties," said Cheng.

According to Cheng, China now plays a greater role in the global gold market. Based on its increased holdings, China is fifth-largest gold reserve nation after the United States, Germany, France, and Italy. In addition, China is also the world's largest gold producer and the second-largest gold jewelry consumer next to India.

"China's demand for gold bullion reached 68.9 tons in 2008, up 176 percent from 25 tons in 2007," said Cheng.

Cheng said gold differs greatly from other investments. "You cannot make a fortune overnight from gold trading, but you won't lose your shirt instantly in gold trading either," he said. For personal investors, Cheng's advice is: It is never too late to enter the gold market, because gold purchases pay off in the long run.

Gold-related shares on the Chinese bourses have also rallied in recent days. Zhongjin Gold Co. surged by 9.29 percent to 76.73 yuan on Wednesday, while Shandong Gold Mining edged up by 5.55 percent to close at 44.5 yuan.

"The declining value of the dollar along with the worsening economic outlook are forcing investors to seek other anti-inflationary investment tools, like gold," said Xiao Zheng, analyst at Ping An Securities.

Immediate-delivery gold prices reached a three-month high on May 22 in New York at $959.75 per ounce, the highest since Feb 26, a reflection of growing fears on worsening global economic outlook and devaluation of the greenback, analysts said.

The precious metal has moved up by 19.73 percent from this year's low of $801.59 an ounce on January 15. Gold prices on the Shanghai Gold Exchange (SGE) also saw a monthly growth of 6.74 percent, from 195.42 yuan on April 22 to 209.05 yuan on Monday.

The global economic indicators have also not exactly been rosy. The latest figures released by the US Commerce Department showed a further sign of economic decline. Buildings permits fell 3.3 percent to a record low of 494,000. The Dollar Index, a measure of the greenback against Euro, Japanese yen, British pound, Canadian dollars, Swiss franc, and Swedish krone, lost 3.4 percent this week on speculation that the US government's creditworthiness may be weakening.

"Key indices are pointing to a downside trend. Investors prefer to stock value-retaining gold," said Xiao. He added that gold outperforms other non-ferrous metals.

Huang Hao, analyst at Sealand Securities, said the recovering demand from India, the world's largest gold consumer in May, is also an important reason for the recent gold price hike.