Fears Bring on China Gold Rush

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At Beijing’s largest gold shop, the queues to buy bullion mini bars have turned into scrums as customers jostle for one of the country’s hottest commodities.

The phone behind the bullion counter rings off the hook as a frantic sales clerk tries to answer buyers’ questions. The electronic chart displayed behind him says it all: the price of gold is rising and Chinese investors, worried about inflation, want in on the trend.

“We were thinking about giving our daughter Rmb10,000 ($1,500) in cash for her wedding,” says an elderly couple. “But then we thought gold might be better value.”

Others are shopping for themselves. “I’ve been buying gold for about six years as an investment,” says a young man in his early 30s who works for a power company. Like many gold shoppers, he is reluctant to give his name or talk about his finances, but discloses his purchase of a 100g mini bar.

For more than 50 years, the state controlled China’s gold market and domestic gold prices. However, today the shiny yellow metal has re-emerged as a popular hedge against inflation. November’s inflation data revealed prices had risen 5.1 per cent from a year ago, the sharpest increase since July 2008.

Low interest rates mean that returns on bank deposits are often negative in real terms, and there are few other options for storing cash. Real estate investment has been curtailed because of government fears of a bubble. Chinese stock exchanges have slumped after a crackdown on insider trading.

The lack of a viable alternative makes gold bars and products popular investment options.

According to the World Gold Council, Chinese retail demand for the precious metal jumped 70 per cent to 153.2 tonnes in the 12 months to September, compared with the same period a year ago. Demand for gold jewellery, by contrast, was up just 8 per cent in China during that same period, to 373.6 tonnes.

China’s bullion bullishness is having a big effect on global gold markets. China’s imports jumped to 209 tonnes during the first 10 months of this year – a fivefold increase from the previous year, says the Shanghai Gold Exchange. China, already the world’s largest gold miner, is now the second-largest consumer behind India.

Gold’s centuries-old popularity in China for jewellery, payments and dowry gifts ended when the Communist party came to power in 1949. The metal was declared a bourgeois symbol and the state assumed control of all gold mines. Prices were set by the government until 2002, when the Shanghai exchange opened and domestic prices started to track international equivalents.

Sales at the Caibai jewellery store in Beijing are up 60 per cent this year, a trend driven by sales of undecorated bullion bars for investment.

“People don’t want to put their money in a bank,” explains Zhu Yan’an, a store official. “The growth in gold bar sales has been really pronounced.”

At a nearby Bank of China branch, the duty manager says apologetically that he has only one gold bar left in stock. “Last week an Indian buyer came and bought all of our 1oz, 2oz and 5oz bars,” he explains. “I haven’t been able to get any new supplies yet.”

Gold-linked investment products, or “paper gold”, are also multiplying. The government recently approved its first fund to invest in overseas gold-backed exchange-traded funds. Hong Kong’s bullion exchange has just announced a gold contract denominated in renminbi.

“I buy gold because it’s fun,” says Lu Feng, a 26- year-old paper company manager who has just spent Rmb18,500 on gold coins engraved with pandas. He proudly displays the shiny 10-coin set to friends. The friends, however, settle for silver.

Old customs of making gifts are re-emerging as incomes rise. At the Caibai store, two grandparents peer across a selection of gold lockets for their soon-to-be-born grandson. The decorative lockets are traditionally given to ensure good luck.

The rising price seems to be fuelling the gold mania in what is, for now, a self-sustaining cycle. “The more the price goes up, the more people buy,” says Liu Hui, who sells the precious metal at a shop near Beijing’s silk market.

On the counter in front of her, Mao Zedong gazes out serenely from an engraved 100g mini bar, complete with one of his poems inscribed on the back.

Souce: Financial Times

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