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Imagine China''s swapping some of its mountain of treasuries for real metal
8:30p ET Friday, September 26, 2003
Dear Friend of GATA and Gold:
While some Western gold bugs are being shaken out
by the usual desperate central bank and bullion bank
manipulation of the gold futures price on the
commodities exchanges at options expiration time,
China is revving up its gold markets and gold
business in anticipation of gold's return as the
pre-eminent currency and preserver of wealth.
It may seem a little strange that the world should
look to China for its hope of free markets and
personal economic freedom generally, but you can
read all about it below, courtesy of China Daily.
The China Gold Association is quoted as saying
that quot;the potential for individual investment in
gold as an alternative to currencies to maintain
private wealth is almost unlimited.quot;
That pretty much says it all.
This dispatch includes only the text of the news
story. Some nice photographs are posted with the
story at China Daily's Internet link.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Focus: China's gold rush
China Daily, Hong Kong Edition
September 25, 2003
Prominent gold experts and officials are urrging the
government to lift the ban on individual trading in the
precious metal as soon as possible, as quoted prices
at the Shanghai Gold Exchange (SGE) continually hit
record highs this month amid a surge in buying
The introduction of individual traders, they say, would
kill four birds with one stone, by invigorating flagging
consumption, slashing the foreign trade surplus,
trimming conspicuous foreign exchange reserves, and
easing international pressures on China to appreciate
It is quot;safe and feasiblequot; for China to spend part of its
foreign exchange reserves on gold imports, as well as
place such purchases on the domestic market and
open the market to individual players at the earliest
possible opportunity, said Xi Jianhua, Bank of China's
gold business expert.
About 20 percent of respondents to a recent national
survey said they were willing to spend 10 to 30 percent
of their savings in gold investment, indicating a huge
potential demand for gold.
Outstanding individual bank savings in China hit 10.61
trillion yuan (US$1.28 trillion) at the end of July. After
trying in vain for years to encourage a high growth rate
in private spending, China has had to rely on proactive
fiscal policies, marked by heavy government investment
since the Asian financial crisis in 1997, to maintain fast
gross domestic product growth.
Based on the survey results, Xi estimated that a possible
injection of as much as 300 billion yuan (US$36.15
billion) in private money could flow into the gold market.
The money would create demand for about 3,000 tons of
gold, he said. It would then only be natural for the country
to expand imports as China currently has just 600 tons
of gold reserves at its disposal, far from enough to cope
with the potential gold rush.
In the initial stages, individual investors would create a
market demand for 300 to 500 tons, according to analysts,
and further growth would be gradual.
Spending on such a scale for gold imports would not have
a significant impact on China's foreign exchange reserves,
they said. Even if the anticipated 300 billion yuan worth of
private investment was made right away, the country's
US$356.5 billion worth of foreign exchange reserves at
the end of July could cater for the demand with ease.
Using the reserves to purchase foreign gold would not only
help withdraw billions of yuan now in circulation, but also
boost the overall national import volume, Xi said, and thus
quot;ease pressures on the appreciation of the yuan.quot;
Xi's suggestions were echoed by Xu Shouxin, vice-director
general of the China Gold Association.
Xu said the association has long proposed promoting
individual ownership of gold, adding that the best way
would be to allow commercial banks to start individual
gold investment services at the earliest possible date.
He also stressed the need to spend part of the country's
foreign exchange reserves on gold imports once the
domestic market is opened to individual investors.
The time is now perfect for the government to make the
move, say analysts, citing potential room for further hikes
in gold prices, both in the domestic and international
Gold prices in China have risen more than 15 percent
since the Shanghai Gold Exchange started operating last
October, initiating free trade in gold for the first time in the
history of the People's Republic of China. But its members
are limited to 108 institutions, including producers,
processors, and traders of gold and gold products, plus
The price of Au99.95, the type of gold used in the
manufacturing of ornamental items, which was 83.5
yuan (US$10.10) a gram last October, climbed to a record
high on September 22, closing at 102.21 yuan (US$12.31).
Meanwhile, the price of Au99.99, gold reserved for
investment-oriented speculation, which was 84 yuan
(US$10.16) a gram last October, closed at 102.45 yuan
(US$12.34) on September 22.
Analysts note that trade at the Shanghai Gold Exchange,
dominated by Au99.95 in the beginning, is now marked
by heavy transactions in Au99.99.
Meanwhile, prices of gold jewellery in Shanghai and other
major Chinese cities also increased by 2 to 3 yuan
(24-36 US cents) per gram this month.
Some SGE members have been increasing their stocks in
anticipation of heightened demand once the market is open
to individual investors, said an industry insider who declined
to be identified. quot;These investors have been very active,
taking every possible chance to buy in.quot;
A gold analyst with the Industrial and Commercial Bank
of China said the domestic gold market is following the
appreciation trend of gold against the US dollar, predicting
that prices will further rise following an influx of new
capital at the Shanghai Gold Exchange.
International gold prices recently hit a six-year high of
US$390 per ounce, exceeding the previous record of
US$388 set in February when the US invasion of Iraq was
imminent. Prices dipped to US$318.75 an ounce on April 7
in anticipation of a quick end to the war but started to
bounce back as it dragged on, and the rising trend has
gained strength since the beginning of this month.
Local analysts say the complicated situation in the Middle
East, the world's oil barrel, and a sluggish international
economy are the two main forces driving the increase in
The slow restoration of peace and order in Iraq, escalating
tensions between Israel and Palestine and the
weaker-than-expected economic recovery in the United
States, Europe, and Japan have blunted consumer
confidence and diverted a large amount of capital into the
gold market, said Li Xisheng, an analyst with Qilu Securities.
Sluggish stock markets worldwide have also driven
investors to the gold trade, Li said.
Xi noted that Japanese investors have been buying in
substantial amounts of gold since the beginning of this
month, while the appreciation of the euro against the US
dollar has produced more opportunities for European
investors in the gold market.
Other analysts even predict that international gold
prices may surpass US$400 an ounce before the end
of the year.
As the world's third largest gold consumer and fourth
largest gold producer, China is suffering from a long-term
shortage of gold, said Li Xisheng.
The country's annual consumption is about 200 tons,
while its production equals roughly 180 tons a year.
According to the China Gold Association, national gold
output hit 88.12 tons in the first half of the year, an
annualized increase of 13.21 per cent. The industry created
a profit of 974 million yuan (US$117.35 million), up almost
60 percent from the same period last year due to rising
gold prices and soaring demand.
However, analysts say, it is difficult for China to maintain
major long-term growth in gold production because of
limited natural resources and production capability.
In China, some 800 producers, each equipped to handle
a daily capacity of more than 50 tons of ore, employ a
workforce of 400,000. Their combined annual gold
production capacity is 150 tons.
However, Li said, 80 percent of these producers have a
daily ore processing capacity of less than 200 tons each.
Small-scale production, a lack of the latest technology
and management techniques, and low production efficiency
keep most Chinese gold producers from being competitive
enough, as do high production costs, he said.
Meanwhile, strong growth is expected in domestic gold
demand over the long term, Li said, as individual incomes
continue to increase.
--First, per capita annual gold consumption in China is
only 0.2 grams, far below that in Western and other Asian
countries. The figure for India is one gram, while the
United Arab Emirates averages the highest at 30 grams.
China is the largest potential jewellery market in the world,
said Chu Xiangyin, an official with the China Council for the
Promotion of International Trade. Consumption of ornamental
objects topped 80 billion yuan (US$9.65 billion) in 2002 and
has been growing by 15 percent annually.
The market value should grow 10 times in 10 years, Chu
China is also on course to become a major manufacturer
of gold jewellery in 2010 as a result of increased private
spending power and lowered import tariffs, said Kang
Xingzhou, vice-chairman of the China Gold Association.
Kang predicted that China's annual gold jewellery sales
volume would reach 189 billion yuan (US$22.78 billion)
by 2010, accounting for more than 10 per cent of the
-- Second, the demand for gold for industrial use will
also increase rapidly as China becomes the world's
Currently, 90 percent of the gold consumed in China is
used to make jewellery.
--Third, the potential for individual investment in gold as
an alternative to currencies to maintain private wealth is
Uncertainties about worldwide political stability and
economic growth have strengthened this function of gold,
For instance, global investment in gold rose by 8 percent
in the fourth quarter of 2001 following the September 11
terrorist attacks, while growth for the previous three
quarters was only 4 per cent.
Closer to home, gold prices in China surged amid plunging
stock markets during the SARS outbreak earlier this year.
Such uncertainties may also bring about adjustments to
China's foreign exchange reserves.
When China's foreign exchange reserves grow to US$400
billion and the ratio of gold in the reserves is brought to 5
percent, according to Merrill Lynch, a new demand for 122
tons of gold will result. Gold comprised just 2.6 percent
of the US$286 billion worth of reserves at the end of last
For thousands of years, the Chinese have traditionally
saved gold and worn gold ornaments, analysts reason.
If the government does decide to allow individual investors
into the sector, the landscape of the entire gold industry
worldwide could change completely.
China's gold rush
The introduction of individual traders in the gold market will,
according to gold experts and officials:
-- invigorate flagging consumption;
--slash the foreign trade surplus;
--trim conspicuous foreign exchange reserves;
--ease international pressures on China to appreciate its
As much as 300 billion yuan (US$36.15 billion) in private
money is estimated to flow into the gold market, creating
demand for about 3,000 tons of gold.
A market demand for 300 to 500 tons of gold will be created
by individual traders in the initial stages.
Gold prices in China have risen more than 15 per cent since
the Shanghai Gold Exchange started operating last October.
Prices of gold jewellery in Shanghai and other major Chinese
cities increased by 2 to 3 yuan (24-36 US cents) per gram
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