Chinese investors favor gold but fear futures
By Alfred Cang and Lucy Hornby
Monday, January 7, 2008
SHANGHAI/BEIJING -- In the world of Chinese finance, gold is everywhere.
The roaring stock market has behaved like a "golden bull", successful asset managers are praised for their "golden fingers," and babies born in the current "Year of the Golden Pig" are believed to enjoy lifelong luck and prosperity.
With world gold prices rocketing more than 30 percent in 2007 to hit an all-time high last week, and a new futures contract due to be launched in Shanghai on Jan. 9, you might think Chinese investors would now look to gild their portfolios a bit.
Gold may be the ultimate safe-haven investment in the global marketplace, but for many Chinese traders whose enthusiasm propelled stock markets and property prices to wild highs last year, gold futures are too hot to handle.
"I will not play the gold futures. Gold is good, elders love it, but futures is another story. I do not want to lose all my money all at once," said Lao Wang, 52, a Shanghainese who has been dabbling in the stock market for 14 years.
"I was considering shifting some investments to gold, but not for futures. Futures is a kind of gambling," he said from his terminal in a stock trading room in Lujiazui, Shanghai's financial hub.
The Shanghai Futures Exchange has spent months laying the groundwork for its new contract, hoping to capture some of the booming gold trade being done by the Tokyo Commodities Exchange or the New York Mercantile Exchange's COMEX.
But it faces a conundrum -- developing a strong liquid market while discouraging the kind of retail speculation that pervades China's stock and futures markets, which it fears would expose inexperienced players to greater risk than they can afford.
Even more than an investment in physical gold bars, the futures market magnifies exposure to international currency and geopolitical developments. That makes the momentum trading that Chinese investors favour more risky.
To deter individual traders, the exchange has raised the size of its gold futures contracts to 1,000 grams per lot -- about $28,000 at current prices -- more than triple the original design.
And it set a higher 9 percent minimum margin requirement for the first days of trading, nearly double that for its successful contracts in base metals such as copper and zinc. That means traders would have to stump up some $2,500 per lot to keep positions open at current prices.
In addition, individual investors are banned from delivering physical gold to settle contracts. They have to close their contracts ahead of delivery days, which means they have no alternative way to minimise losses.
The measures deter some Chinese who are already active in gold trading in London and New York from playing the home field.
"The margins are too high in Shanghai compared with trading in overseas markets, such as in New York and Tokyo," said Vivian Jiang, an individual investor trading overseas gold futures contracts via Hong Kong-based brokerages.
"People in my circle will not trade Shanghai gold futures. We think the prices there will track overseas bourses anyway, and the trading hours are too short."
Analysts do not expect Chinese trade to drive gold to fresh peaks immediately, but the launch of futures does have the potential to raise bullion's profile as an investment vehicle in a country that has thus far shown relatively scant interest.
"What I am anticipating is that sometime in the next few years we will hit a period of time when activity by investors in China ... becomes the most important thing in the gold market for a length of time, much in the same way as TOCOM has dominated the gold market from time to time," says John Reade, metals analyst at UBS Investment Bank in London.
"It won't last forever but does have the potential."
In a country where investors are accustomed to outsized gains in traditional markets -- the main Chinese stock index soared 97 percent in 2007 -- gold has yet to shine.
Chinese buying of physical gold for investment purposes rose about a third in 2006 to nearly 15 tonnes and jumped by 66 percent in the first three quarters of last year, but remained about one-tenth that of India, the world's biggest consumer and investor, the World Gold Council said.
Analysts and traders have been holding their breath for years in anticipation of China catching the gold bug, a malady that could drive global prices higher still, just as its demand for oil, copper and other resources has aided a five-year price boom.
Chinese citizens have poured money into bank accounts pegged to the price of gold, known as "paper gold," while it is one of the few nations in the world where gold jewellery demand has held relatively steady despite rising prices.
But a futures contract does not seem likely to be infectious.
"I am not too sure what use the gold futures are, except for the jewellery industry, which isn't actually accustomed to hedging," said Chen Wen, general manager of trading and investment firm Symbol Resources HK.
Many worry that any further gains in dollar-denominated gold could be capped by central bank efforts to combat a housing crisis that has accelerated a U.S. dollar slide.
Gold hit a record of $862 an ounce in its first day of trading in 2008, while crude oil touched $100 a barrel, but the rise of the yuan would have diminished those gains. Gold's 61 percent rise in dollar terms since 2005 was a paler 46 percent gain in yuan terms.
Last year, China's central bank allowed its tightly controlled currency to appreciate by 6.86 percent, accelerating from 3.40 percent in 2006 and 2.56 percent in 2005. Analysts expect another 7 to 9 percent rise this year.
"The rally in gold was crazy, there was too much speculative trading and the spot price of gold is too high now," said Xiao Xu, a 34-year old Shanghai man who has followed gold prices since he left his previous job at a jeweller.
* * *
Join GATA here:
Vancouver Resource Investment Conference
Sunday-Monday, January 20-21,2008
Vancouver, British Columbia, Canada
* * *
Reserve the dates:
The next GATA conference
Friday and Saturday, April 18 and 19, 2008
Maybe "GATA Goes to Washington -- Anybody Seen Our Gold"?
Washington, D.C., area
* * *
Help Keep GATA Going
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.
GATA is grateful for financial contributions, which are federally tax-deductible in the United States.