Yellow metal loses shine with investors

Yellow metal producers in China may see further profit erosions as gold prices are set to decline in the coming years, amid expectations of an interest rate hike by the US Federal Reserve and a strong dollar, industry sources said.

Song Xin, president of the China Gold Association, said on Monday international gold prices are seeing a downtrend after the sharp drop in 2013, and it is likely to become a "new normal" for the next couple of years.

"This, in turn, will affect the profit of many Chinese gold companies after deflation in costs and commodity prices," he said.

Profits of the country's 10 listed major gold miners such as Zijin Mining Group Co Ltd and Shandong Gold Group Co Ltd dropped by 12.9 percent to 6.8 billion yuan ($1.1 billion) in 2014, according to the association.

From January to June, China, the world's largest producer of gold, produced 228.7 tons of gold, an 8.4 percent year-on-year growth. Bullion output in Shandong province, which accounts for 21.3 percent of the country's total production, rose 12.7 percent year-on-year, the CGA said.

"China's gold production has grown steadily," said Zhang Yongtao, vice-president of CGA, adding that places like Gansu province and Inner Mongolia autonomous region, which have discovered more gold reserves, will boost gold production for the second half.

However, the country's gold consumption tumbled 1.4 percent to 561.4 tons in the first half of this year, the association said.

The plunge in demand was mainly attributed to a drop in consumption of gold jewelry and gold bars, which saw year-on-year dips of 3.3 percent and 10.7 percent respectively, during the first half of this year, said the association.

But the consumption for industrial use rose nearly 43 percent year-on-year to 46.9 tons for the same period, the data showed.

Experts said the drop in gold demand this year was mainly because of falling prices and "abnormal" buying frenzy since 2013, adding that gold demand will remain stable in the long run.

Zhang said the bull run in China's stock markets from the middle of last year prompted many investors to switch from bullion to capital market investments.

"But many private investors still see the yellow metal as an effective hedge against losses and a means for long-term diversification of risks, as its intrinsic value is still intact," he said.

In July, China said its gold reserves rose for the first time in more than six years, making it the world's fifth-largest in terms of stocks, the association said.

The People's Bank of China said gold reserves rose by 57 percent to 1,658 metric tons, a testament of gold's nature as a special asset, he said.