Chinese shoppers look at gold jewellery on display at a shop in Hefei, east ChinaÂ¡Â¯s Anhui province on May 19, 2011.
China’s emergence as the world’s biggest consumer of gold needs to be considered alongside a lesser appreciated fact: The country is also the biggest producer of the yellow metal.
This week, the World Gold Council said in a quarterly report that Chinese buyers overtook Indians as the globe’s biggest purchasers of gold in the first three months of this year. Despite producing nearly 351 metric tons of the metal in 2010, China’s gold demand last year hit 700 tons, meaning the country may continue to absorb bullion imports.
“It’s sort of like sending oil to Saudi Arabia,” James R. Steel, a New York-based metals analyst for HSBC Holdings Plc told a group of reporters Wednesday.
The eye-catching news about Chinese demand wasn’t the country’s only footprint on the gold market this week.
A Shanghai official caused a market stir Sunday when he said at a conference that China could shortly launch an exchange traded fund, or ETF, that tracks gold Â¨C potentially opening a new avenue to retail demand.
Such factors are high on the agenda of gold bugs, like Mr. Steel, who are descending on Shanghai for a conference this week.
“There’s a saying, gold goes where the money is,” said Mr. Steel. “Now gold is coming to China.”
It’s also where the money may increasingly be coming from. Chinese companies are keen for international gold assets and one company to watch is Zijin Mining Group Co., the country’s biggest gold miner but one with a less-than-shiny environmental record recently.
Mr. Steel said an ETF could be important in sparking demand for gold in China in the same way similar financial derivative products have done in the U.S. market where the 10 largest ETFs represent some 2,200 metric tons of gold. If Shanghai goes ahead with the ETF plan, he said, “it would however take away from the jewelry market a little bit” as investors look to a product that is a pure play in the metal and carries less risk of being stolen.
It’s unclear how far off a Chinese ETF might be, or whether it would even be a success where other gold-related financial products haven’t taken off.
The ETF tip emerged from Wang Zhe, general manager of the Shanghai Gold Exchange. He offered it during a conference used annually to trumpet the city’s importance as a global financial center and where trial balloons hoisted in past years haven’t become policy very quickly, including the one HSBC wants to take advantage of with a stock listing on the Shanghai market.
According to a Global Times report this week, officials say a number of major challenges remain before an ETF can launch, including who would regulate it.
A Chinese underpinning to gold follows major selloffs that have dominated global headlines about gold Â¨C and silver Â¨Cin recent weeks.
“It was risk coming off the market that pulled gold down,” said Mr. Steel. For silver there had been “too much investor interest in too short a period.”
Mr. Steel’s forecasts keep gold at a relatively high level compared with historical averages. He predicts the metal could potentially reach $1,700 per ounce late in the year, but would end up with a 2011 average of $1,525. For next year he sees the average at $1,500, while HSBC research puts the 2013 price at $1,450.
So, is it time to invest in gold? Mr. Steel said he isn’t authorized to say, but noted the price outlook isn’t the only consideration. “To me, the real value of gold is as a diversifier,” he said.