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
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
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
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.