Gold still glitters in China

By Wei Tian and Wu Yiyao in Shanghai (China Daily) Updated: 2013-08-13 07:24

Worldwide, the gold market is heading for its worst year in three decades. The price has dropped 27 percent in the first six months.

Faith in the metal as a store of value also suffered from speculation that the United States Federal Reserve will curb debt-buying, which will lead to the winding up of the quantitative-easing environment and negatively affect gold's role as a safe-haven asset.

The reverse trend in China was largely due to a spending frenzy by "Chinese aunties", who were reported to have snapped up more than 300 tons of gold within 10 days when the price started to go down in April.

"Demand in China has great potential to improve further because the country encourages private sector holdings," said Zhang Wei, an analyst at Zhaojin Futures Co. Chinese gold investment demand surged from 15 metric tons in 2006 to 274 metric tons in 2012.

China was the world's second largest user last year. Data from the World Gold Council suggested the country may overtake India to claim the top spot this year.

Indian Finance Minister Palaniappan Chidambaram said on July 31 the country will curtail gold imports to below 845 tons this year as it takes steps to curb a record current-account deficit and defend the currency. As a result, the country has doubled a tax on imports and tightened rules on overseas purchases to tackle a surge in demand.

Demand for gold bullion and jewelry in the remainder of 2013 may be stable, according to Yang Fei, an analyst at Seewonder Financial in Shanghai.

Buying of gold jewelry may pick up because of seasonal demand during October and at the year-end during traditional holidays and festivals. Such demand may not be significantly affected by price volatility, Yang said.

Gold may remain appealing for investors because China has been introducing more varieties of investment products in the precious metal, Yang said, adding that investors need to look at factors that affect gold prices beyond China's market.

"There are several globally interrelated factors that influence the gold market, including currencies, interest rates, inflation, personal spending and systemic factors. The short-term investment based on these themes reinforces the need for a dynamic framework in which to think about the gold market," a World Gold Council note said.

"Jewelry, bars, coins and technological applications make up the majority of demand - and growth in disposable income and consumer spending promote purchases of these goods. In particular, as emerging markets, which account for the largest share of demand, expand further economically, higher levels of wealth increase demand for gold," it said.