By He Langsha
China opened the gold market to individual investors in 2002. By 2010, with influence from international economy environment and the maturity of domestic market, China's precious metals (including gold) investment market has been growing phenomenally. Take ICBC, a leading commercial bank in precious metals business, as an example. As per the end of 2010, the number of ICBC's precious metals clients has more than doubled since the beginning of the year. The transaction volume of precious metals in the whole year was nearly 24 times more than that of 2009. ICBC's statistics is a typical reflection of the bloom of China's precious metals transactions as well as the thriving investment demands in the market in 2010.
Market volume expansion and thriving demands
What are the characteristics and development trend of the precious metals (such as gold) investment market in China in 2010?
Sun Zhiming, general manager of the Haidian Office of Beijing Gold Exchange, believed that the opportune publication of Suggestions on Promoting the Development of the Gold Market by 6 government authorities, namely the People's Bank of China, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Finance, State Administration of Taxation, and China Securities Regulatory Commission, has a profound influence on promoting the sound development of the market.
Also, the market volume is increasing rapidly, as represented by the large increment of the number of investors and employees in the industry. According to estimation of the Haidian office, there were about 3 to 4 new comers in every 10 gold investors in 2010. While in 2008, the figure was at best only 1.
Thirdly, there are more varieties of precious metals for investment. Currently in China, investment vehicles in precious metals include physical gold and silver bars, jewelries, paper gold, Au (T+D), gold futures, and public company stocks, among others. On January 13, 2011, the first gold fund in China - Lion Global Gold Fund was officially launched, providing investors with another channel to invest in gold. The fund filled the blank of Chinese investors investing in international gold market.
Fourthly, banks, particular commercial banks, have become the main bodies for the development of the gold market. For instance, the Beijing Gold Exchange has established business relation with ICBC, China Construction Bank, Jinshang Bank, and Shenzhen Development Bank. They make use of each others' expertise in providing more comprehensive services to respond the market demands.
Fifthly, demands for physical gold are thriving, and there are numerous varieties of gold products with different values and subject matters in the markets.
Sixthly, investors' demands for money management are more diversified, and the proportion of investment in precious metals is becoming bigger in the household financing portfolio. With the increment of investors, a single variety can no long meet the various demands of investors. Due to the difference in investors' financial strength, investment background, and risk tolerance, the needs are diversified when investors are choosing specific investment vehicles.
Multiple factors needed to be considered when making an investment
In the 4th quarter of 2010, international gold price maintained an upward trend in spite of fluctuations. New historic heights were recorded frequently. In January 2011, the price stayed in deep correction alternating with slight rebounds, indicating the seesawing between long position and short position. Therefore, investors in the market currently are more concerned about the medium-long term trend of the precious metals market.
According to statistics from the research department of CITIC Securities, the proportion of ETF open interest in the annual consumption of global precious metals has been increasing since 2004. For example, the proportion of global gold ETF open interest in the annual gold consumption volume in 2004 was merely 5 percent. But in 2010, the figure has grown to be more than 50 percent, which provides an important support to the ever rising international gold price. Xue Feng, analyst of the research department of CITIC Securities, believes that the currency environment in major European and American countries will stay loose due to the slow recovery of the job market and the limited choices of financial policies. The market is not confident about currency stability, which may be the most important potential support to the bull market of hard currencies such as gold.
Regarding the performance of gold in the securities market, Xue Feng said they would maintain the comment of ��stronger than the general market�� because of the stable high price of gold, the optimistic medium-long term perspective in the market, and definite expectations for the growth of domestic companies.
In addition, the analysis report by China International Capital Corporation suggests that the relevancy between gold and US dollar has increased from 2003 to 2004. The risk asset attribute of gold puts it in a negative correlation with the riskless US dollar. Nonetheless, gold can also be used as a hedge asset, which puts it in a positive correlation with the US dollar. In 2010, a positive correlation was found between gold and the US dollar. As the globally macro-economic environment improves, the function of gold as a hedge asset will weaken. Therefore, it can be expected that a long-term negative correlation between gold and the US dollar will resume in the market in future.
Besides, international data show that global gold ETF has increasing holding of 330 tons of gold. As per the end of 2010, the total volume was 2,140 tons (total value of about US$98 billion dollar). In December 2010, a new height of 2,155 tons was recorded. However, the increment rate in 2010 was almost reduced by one half of that in 2009 which witnessed a growth of 614 tons. This somehow reflects the operation method of institutions in taking the right opportunity to lock in the profit in 2010. It is a method ordinary investors should also pay attention to and follow.
During the Spring Festival, the reporter learned from Beijing Caishikou Department Store and other jewelry stores that consumers were very enthusiastic in buying gold accessories, new-year gold bars and investment in gold bullion. Gold rabbit pendants and Chinese zodiac silver and gold coins fell short of demands.
Business insiders point out that limited versions of new-year gold bars are excellent investment collections generally. However, whether their values will increase or not will depend on the market trend of the specific variety of collection. If what the investor pursues is the value maintenance and appreciation, then it is suggested that the investor should buy gold bars through normal channels, which offer the products at relatively low price and have more reliable and convenient repurchase system.