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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.

 

The Wall Street Journal


China's great leap into gold

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