Record prices spawn new wave of China gold bugs


By Fayen Wong
Monday, August 29, 2011

SHANGHAI -- Record gold prices, rather than denting China's enthusiasm for bullion, have emboldened investors to plough more money into gold bars and riskier bullion-based derivatives.

August is traditionally a slow month for Chinese jewelers, but many shops in Shanghai visited by Reuters reported surprisingly solid gold sales over the last few weeks, with shoppers unfazed by gold's stellar price gains over the past few months.

"The surge in prices has sparked another gold-buying craze. The 50 gram and 100 gram gold bars were selling like hot cakes," said Ms. Liu, a store manager at Shanghai's major jeweler Lao Feng Xiang Co Ltd, who said gold sales this month were up at least 30 percent from a year ago.

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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit,
Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

The attitude of Chinese consumers -- expected to soon overtake Indians as the world's top buyers of gold -- will be an important influence on longer-term trends.

Demand from the world's most populous country, which is adding hundreds of thousands of people to the ranks of affluent and middle-income consumers every year, implies that the long-term price floor for gold is set for a steady increase.

That demand may also help smooth out temporary drops in prices.

Spot gold has come off its record highs of over $1,900 an ounce hit last week, falling back to around $1,820 an ounce, but such dips appear only to embolden consumers.

"Many Chinese investors and consumers see price corrections as buying opportunities. The view that gold is an enduring store of value is firmly rooted in Chinese cultural traditions," said Hou Xingqiang, a gold analyst at Jinrui Futures.

"Gold's rally over the past two years and the debt worries in the West have only strengthened Chinese investors' belief that they need to own the metal as an investment asset."

There is no shortage of bulls on Wall Street forecasting even higher gold prices, with J.P Morgan predicting at least $2,500 an ounce by the end of the year.

Amid the gold frenzy, China's banks and brokerages have been quick to offer paper gold investments to cash in on the trend.

Trade sources at the Bank of China and Industrial and Commercial Bank of China say demand for their gold-linked savings products has soared, while a growing army of retail investors are also eager to dive into the paper gold market.

Expectations that gold will extend its bull run have also encouraged investors into the country's nascent gold derivatives markets, such as the forward and futures contracts on the Shanghai Gold Exchange (SGE) and Shanghai Futures Exchange.

Volumes for SGE's most popular gold forward contract hit a record high of 350,670 grams in August -- double the volume in July.

"More investors are moving into paper gold because of the lower capital costs. The prospect of making big and quick bucks by betting on gold's ascent is beginning to look like a fairly easy way to make money," said He Wei, a gold analyst at Nanhua Futures.

That could create other risks down the road, however, which authorities are trying to fend off.

Investors buying gold swaps and forwards generally do so on margin, putting up only a part of the money themselves -- potentially setting themselves up for much bigger losses should the market turn sour.

Alarmed by the surge and worried that the giddying climb in prices was encouraging excessive risk-taking, the SGE raised margin requirements twice this month to 12 percent.

The explosive interest in gold investments has also led investors to move to less mainstream derivative products offered by over-the-counter exchanges that have sprung up in recent years, bringing about new risks given the lower margin requirements.

The Tianjin Precious Metals Exchange, established in 2010, has seen a leap in demand for its swap contracts.

"The capital outlay for swap contracts is even lower and it's becoming a popular investment instrument," said Han Qingsheng, a trading manager at Gold Day, a brokerage for the Tianjin Precious Metals Exchange.

While the government is taking a somewhat cautious approach, people's thirst for new investment products will no doubt accelerate China's opening up of the gold sector -- a move long awaited by foreign banks.

In a sign that more changes are afoot, the China Banking Regulatory Commission has already granted membership to two foreign banks to trade gold futures on the Shanghai Futures Exchange.

Industry watchers said changes on the horizon include night trading for the SHFE's gold contracts and expanding the list of domestic banks allowed to import gold -- a big step toward a full liberalization of the sector.

"As physical demand increases, the government will need to increase the supply avenues and some foreign banks have an advantage because of links to overseas mints or foreign trades," said a senior executive at foreign bank.

"This would be the next step we're all waiting for."

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Lewis E. Lehrman on How to Solve the U.S. Debt Problem

Lewis E. Lehrman, chairman of the Lehrman Institute, sponsor of The Gold Standard Now project, advises that to reduce the $1 1/2 trillion U.S. deficit, the Republican Party must initiate an investment program.

Working Americans are not saving, which enables the banks to lead the country into a cycle of debt, leverage, boom, panic, and bust.
Lehrman says: Eliminating the budget deficit of a trillion and a half dollars cannot be done overnight. The proposal by U.S. Rep. Paul Ryan was very dramatic -- one Republican called it radical -- but it was not happily received. The solution, of course, is to design an American program for prosperity, because you can solve these entitlement problems with a growing economy. We need a tremendous program of investment, and investment comes from savings. When you pay savers, middle-income professionals, and working people 0 percent at the bank, you are not going to encourage them to save. Then we are left with a bank cycle of debt, leverage, boom, panic, and bust."

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