Gold rush in China

BEIJING: Ms Zhang Cuiping is spending the Golden Week public holidays on one of the hottest national pastimes this month – buying gold.

The accountant has been jostling with crowds in jewellery shops since China’s national day last Friday, even as prices of the precious metal have hit record highs.

‘Everyone is buying gold – my colleagues, the vegetable seller… and I’m sure the government is buying a lot,’ she told The Straits Times at a jewellery outlet as she was choosing bracelets priced at a record 340 yuan (S$67) per ounce.

Besides consumers like Ms Zhang, local investors and officials seeking to diversify China’s US$2.5 trillion (S$3.3 trillion) of foreign exchange reserves have joined a global gold rush in the past year.

Some speculate that the nation’s growing appetite for retail gold may turn it into the world’s biggest consumer, surpassing India, which bought 123 tonnes last year compared with China’s 75 tonnes.

This month, with gold futures crossing the psychological level of US$1,300, its influence as the world’s biggest producer and one of the largest buyers of the precious metal has never been greater.

All eyes are also on the role of its controversial yuan policy in contributing to the 5 per cent spike in gold prices last month, amid fears of a currency war.

The metal has become a safe haven for investors as the United States dollar, clouded by a murky economic outlook, continues to slide, said Mr David Cohen of research company Action Economics.

‘Gold has appealed to investors… who have been fleeing from other currencies in the past month or so,’ he added.

Many governments from Asia to Latin America have been intervening to keep their currencies from rising.

Their moves are somewhat similar to what China is allegedly doing to the yuan, which some claim is still 25 per cent undervalued despite Beijing’s shift to a more flexible currency policy in June.

Nervous that governments may make their currencies cheaper – and hence cheapen exports, investors, including rich Chinese, have been shifting to gold.

‘My clients have been buying a lot more gold so that they can allocate at least 10 per cent of their portfolios to precious metals,’ said a Hong Kong-based private banker who declined to be named to protect her tycoon clients’ privacy.

These clients are among those taking advantage of Beijing’s recent move to ease restrictions on gold imports.

This will help address the growing shortfall between demand and supply, which hit 144 tonnes last year, said Mr Albert Cheng, a World Gold Council executive, to Reuters last Tuesday.

A major chunk of China’s gold supply, which is mined by state-owned companies, is believed to have been absorbed by Beijing, as it parks more of its forex reserves in gold and other commodities.

The country surprised the bullion market when it said last year its gold holdings was more than1,000 tonnes, almost double what it had earlier claimed to hold.

This makes up about 1.6 per cent of its reserves. In order for this proportion to reach the world average of 10.7 per cent, it would need to buy some 7,000 tonnes – thrice last year’s global mine output.

Now, some are worrying that China’s demand will put a huge strain on the global market and drive up prices further.

Gold is already tipped to hit US$1,500 per ounce next year.

‘China… could consume the global annual supply of gold mining production and still only hold 5 per cent of gold (as a proportion) to total foreign reserves,’ said Australian bank ANZ in a report.

But others are more sanguine, saying that it will avoid large-scale gold purchases which will spark market panic – just as it has not dumped US treasuries so far.

Mr Cohen added that China will be savvy about managing the risk of its forex reserves investments, including gold.

‘Gold is a very volatile investment – and China knows that. I don’t think they will overdo it.’

Source: Straits Times (subscribers only)

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