New wave of gold rush hits China
By Liu Jie (China Daily)
Updated: 2004-12-02 10:13

The gold rush is reaching a feverish pitch in major cities across China.

In a Beijing store, 300 kilograms of gold bars minted by the China Gold Coin Inc to commemorate the Year of the Rooster, going for a retail price of 125 yuan (US$15.60) a gram, were sold out within seven hours on November 19.

To avoid a stampede for the precious metal, the store, Beijing Caishikou Department Store, arranged the sale of the second batch of gold bars on November 26 through a telephone hotline rather than over its counters. Although the price for each gram of a bar has increased to 128 yuan (US$15.42) this time, demand exceeded supply by a big margin, according to Wang Chunli, the store's general manager.

Gold, as a symbol not only of wealth but also of good fortune, has always had a special place in the hearts and minds of the Chinese people.

Other than tradition, the latest round of the gold rush has been fuelled by a combination of factors, including the depreciation of the US dollar, the world's major reserve currency; and the surge in prices of a wide range of commodities, including oil, otherwise known as black gold.

Unsurprisingly, China's 300 or so gold producers are smiling all the way to the bank.

Their combined profits for the first three quarters of 2004 jumped 35 per cent from a year earlier to more than 2 billion yuan (US$240 million). China's gold production during those three quarters increased 7 per cent from a year earlier to 149 tons, while demand is expected to increase to 220 tons in 2004 from 207 tons in 2003.

The strong demand for the yellow metal has not gone unnoticed by the nation's banks and other financial institutions, which are gearing up to cash in on the boom.

For instance, Bank of China's Shanghai branch, in November introduced "Gold Treasure," a gold-based investment instrument operated by the People's Bank of China, the central bank.

"Gold Treasure" has been designed to make it convenient for the public to invest in the precious metal. Instead of taking physical delivery of the gold, the investor is given a document issued by the bank certifying the amount purchased. The investor can sell the gold back to the bank and surrender the certificate.

A central bank source says that trading in "Gold Treasure" has been increasing by more than 40 per cent in volume per month this year. Demand has consistently exceeded supply by a wide margin, the source said.

Investors who take pleasure in counting gold they have can opt for the CGS bullion bars that come in three weights: two, five and 10 ounces.

They all come in one purity standard: 99.99 per cent. Minted by CGS Limited, a joint venture between mainland and Hong Kong bullion traders, CGS Standard Gold Bars have become a favourite of China's gold investors since they were introduced to the market in July.

Pricing of the CGS bars is based on the daily gold price on the London Precious Metal Exchange with the quotations on the Shanghai Gold Exchange serving as a reference.

Sales agents for the CGS gold bars say that demand from investors has been rising. What's more, buyers are holding onto their gold expecting further increases in the price, the agents say.

For example, figures released by China Merchants Bank show that sales of CGS gold bars at its Beijing branch amounted to 180 kilograms in the period from July 12 to November 15, while repurchase of the bars previously sold totalled only 15 kilograms.

An executive of the bank's branch figures investors in CGS gold bars have, on average, made a gain of around 5 per cent.

"But still, few investors are willing to take the profit at this time because of the continuous strong up trend (of the price of gold)," he says.

Like thousands of investors, Long Jing, a middle-aged executive of a foreign-funded enterprise in Beijing, bought 2.5 kilograms of CGS gold bars on July 23 at 105.2 yuan (US$12.67) a gram.

But unlike most others, she sold the gold back to the bank in mid-August when the price went up to 117.26 yuan (US$14.13) per gram and pocketed a total profit of 37,000 yuan (US$4,458), excluding commissions and other charges.

Describing herself as a "proactive" investor, Long says she was back in the game in October buying 3 kilograms of gold bars. "I am watching the market very closely for the best time to sell," she says.

Banks are also getting into the game in a big way. China Merchants Bank, for instance, has applied to the China Banking Regulatory Commission for permission to provide an on-line gold trading service to its customers and allow customers to use the gold they own as collateral to secure loans.

CGS is understood to have made a similar application to the bank supervisory agency.

A recent questionnaire by the Beijing Gold Economic Development Research Centre in 10 major cities in China showed 70 per cent of respondents said they would invest in the gold trade if they had the money.

More than 20 per cent of securities investors would transfer part of their capital to gold trade considering the gloomy stock and securities markets on the Chinese mainland.

While the average punters have been hit by gold fever, the professionals on the Shanghai Gold Exchange are keeping their cool.

After a 40 per cent surge in the first 10 months of this year, trading began to level off.

"We are seeing a cooling-down in activity as traders become increasingly cautious," says an exchange manager.

"The big price jump in the past several months has many traders worried about an impending correction which could be equally dramatic," he says.

In the face of the continuing price surge, experts and insiders hold various views about the trend of the market.

Paul Walker, CEO of GFMS Ltd, the London-based precious metals consultancy, says "a slump in the dollar and a surge in (gold) investment is likely to continue.

Walker made the comment at an international forum on global gold outlook, infrastructure support and market development held on Monday in Beijing.

An analysis report, conducted by ANZ (Australia and New Zealand Banking Group Limited), indicates the gold price is expected to exceed US$500 per ounce.

The report said the double deficit surge in the United States, which could not be offset in a short period of time, might drag the US dollar further down, stimulating gold to climb to a new record.

However, Liu Shan'en, an analyst at Beijing Gold Economics Research Centre, describes the current bullion price as "incredible."

He says the market is reaching the apex of the up-cycle. "I expect that it (bullion price) will return to a more rational level anytime soon," he says.

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