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Don’t write off gold’s prospects, industry says
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Gold purchases in China last year recorded their first annual decline since the 2013 peak, when a drop in global bullion prices triggered a frenzy of buying by middle-aged Chinese women that caught even Wall Street investors by surprise.
Chinese sales in 2014 fell almost 25 percent from a year earlier to 886 tons, according to the China Gold Association. That was the first drop since a market in gold investment opened in China in 2012. Analysts attributed the decline to lackluster investor sentiment.
Industrial experts said they are not particularly worried about the trend.
China relinquished its title as the world’s largest gold market to India last year after a one-year reign, but its importance to gold traders hasn’t diminished.
Shanghai Daily sat down with Albert Cheng, managing director of the World Gold Council Far East, to discuss China’s bullion market and consumer attitudes toward the precious metal.
The World Gold Council, a UK-based industry association comprising the world’s 19 leading gold mining companies, is committed to promoting gold consumption for investment, industrial and personal purposes.
Cheng joined the council’s Singapore regional office in 1993, where he was responsible for operations in China, Japan, South Korea and Southeast Asia. He became the council’s managing director in 2003. He has been one of four international advisors to the Shanghai Gold Exchange for 13 years.
Q: The council has signed an understanding agreement with the Shanghai Gold Exchange to work more closely via the International Board set up in the city’s pilot Free Trade Zone last September. Could you tell us how that will work?
A: The memorandum of understanding involves objectives to improve operation of the Shanghai Gold Exchange, such as attracting more international players. Gold is a hard currency, so if it is freely traded in China, it will have an impact on the yuan. The design of the International Board, allowing international and domestic investors to participate in the onshore gold market, has a symbolic meaning of some kind of convertibility. By signing the memorandum, we can help the Board marketing this concept to the international trading community.
Also, under the agreement, we will work more closely with the China Gold Association and the Shanghai Futures Exchange on data collection and analysis. If you want to promote a market, you need good data. Currently, we have many sets of data from different institutions, and from those, we hope we can create authoritative numbers for the international market.
Historically, the centers for gold trading were London and New York. In the past decade, we have seen migration of physical gold to Asia, especially to India and China. It’s only recently that gold exchanges were set up in Hong Kong, Singapore and Shanghai to cater to the changing scenario. The better the market structure, the more effective it will be in improving demand for gold.
I think the Shanghai Gold Exchange has the ambition to attract international investors, first from Asia and then from around the world.
Q: How can the International Board attract more international players?
A: The most important issues for investors are infrastructure, services and trading costs. The International Board has already set up a safekeeping vault to store gold for companies. You have to be very competitive in providing services and procedures for movement of the metal.
The China market has a lot of regulations, and building up the International Board needs some reforms and support from local authorities. Movement of gold and money has to be as efficient as possible. Also, fees have to be competitive with other markets. A gold exchange also needs to provide tools for hedging and speculative hedging.
We don’t have details of costs on the Board yet, but the Shanghai Gold Exchange is clearly working on a pricing system to make it competitive.
Q: Are you worried about the decline in China’s gold consumption last year?
A: No. The year 2013 was extraordinary because when the price dropped, bargain hunters emerged in India and China. But if we look at the data for the past five years, we find that consumption in 2014 was actually above the five-year average. In fact, sales of gold jewelry had their second-best year in history. Investment in gold coins and bars declined faster than jewelry last year, yet both were still higher than the period during the financial crisis. The continuous growth of investment in coins and bars indicates that those who bought in 2013 are still holding on to their investments.
There is nothing to worry about. Chinese people still feel peace of mind when they have cash and gold somewhere. What we are looking for is sustainable growth. China is still a gold importer because domestic production can meet only about half of the combined demand for jewelry, coins and bars.
Q: How do you see this year?
A: We expect gold consumption in China at between 900 and 1,000 tons this year. I’m more optimistic about this year because people have adjusted to the “new normal” of such factors as slower economic growth and the government’s anti-extravagance campaign. Jewelry is still likely to make up about 70 percent of domestic gold sales. I think China has the world’s best infrastructure for jewelry sales.
The second factor is price. Last year, gold prices were relatively flat. This year, we see an upward trend. So far this year, the gold price in China is about 3 percent stronger. Also, the yuan has depreciated against the US dollar, and the volatility of the local currency could lift gold consumption.
Gold so far has been a stable investment, considering the weakness of other commodities and currencies against the strengthening US dollar. A strong US dollar usually leads to a decline in gold prices, but sometimes both go in the same direction, such as in 2009 after the financial crisis, when both were considered safe havens.
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