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China refines its role in global gold market
A bit player only a decade ago, China has emerged as one of the most important forces in the global gold market, helping fuel the rising value of the precious metal.
Already the world’s largest producer — it overtook South Africa in 2007 — China is now bedecking itself in bling. It’s on track to become the globe’s largest consumer of gold as early as this year, knocking off India, whose elaborate wedding dowries kept it on top for years.
Some of China’s gold is going to its central bank as the government quietly boosts reserves. But the biggest driver is Chinese consumers. They’re snapping up jewelry, coins, and bars as a hedge against inflation and to flaunt their rising wealth.
To witness the frenzy firsthand, head to Beijing’s Caishikou Department Store, a four-story gold emporium that rang up sales of $1.5 billion last year. Visitors be warned: Sharpen your elbows and be ready to push.
To buy a necklace, shopper Wang Li recently fought her way through a scrum of cash-waving customers hanging over a glass counter loaded with gold chains, Mao pins, pendants of Christ on the cross, and more.
“I thought about buying Swarovski crystal, but I don’t think it will ever be as valuable as gold,” said Wang, a 24-year-old teacher who treats herself to a new piece of yellow-metal jewelry about once a month. “Besides, I like how feminine gold makes me feel.”
On another floor, customer Zhang Li waited in line to purchase gold bars, an investment he describes as the only safe bet left for ordinary Chinese.
“If I had invested in stocks or property last year, I would have lost money,” said Zhang, 36.
Chinese demand reached nearly 770 metric tons last year, up 20% from the year before, according to the World Gold Council in London. Desire for the yellow metal is so strong that China is buying record amounts from abroad because its mines can’t keep pace. China imported more gold than India in the fourth quarter of 2011.
Gold in New York hit a three-month high Thursday before slipping $9.80 Friday to $1,775.10 an ounce. Analysts said strong demand from China is a factor in the recent run-up.
“There’s no doubt that China will eventually be No. 1,” said Jeff Clark, a senior precious metals analyst for Casey Research in Stowe, Vt. “Our jaws have been dropping at the volumes being imported for over a year now.”
Gold for centuries has been a store of wealth and a symbol of good fortune in China. But China’s heavyweight status in the gold market is more recent. In 2002 the central government lifted controls and set up the Shanghai Gold Exchange, allowing the metal to be priced by market forces.
In addition, Chinese consumers eventually were allowed to purchase bullion through commercial banks. Today China accounts for 26% of global gold demand, up from 6% a decade ago.
“Chinese demand has traded positions with the U.S. in the last decade,” said Albert Cheng, Far East managing director of the World Gold Council. “It’s very clear the gold market is moving east.”
Meanwhile, consolidation and foreign investment in China’s mining industry produced larger, technologically sophisticated players. The result? The nation’s gold production has nearly doubled in the last decade to 360 metric tons last year.
No group has welcomed China’s liberalization of gold more than the country’s middle class.
Rising incomes have whetted consumers’ appetite for jewelry and other luxury goods. But it’s also about security. With the real estate and stock markets gyrating and banks paying minimal interest rates on savings accounts, many Chinese view gold as the best vehicle to protect their savings from inflation.
“Gold in China is always about safety,” said Andy Xie, an independent economist in Shanghai and the former chief Asia Pacific economist for Morgan Stanley. “It’s the preferred asset when the world is in chaos. China has failed to give people a sense of security.”
Although international gold prices have retreated from their peak of $1,891 an ounce in August, analysts expect values to be partly buoyed by demand from central banks in emerging markets, including China.
China’s government is suspected of quietly stockpiling more gold to diversify its $3.2-trillion holdings of foreign reserves and reduce its reliance on the U.S. dollar. China rarely discloses its purchases. But it’s assumed the central bank holds a little more than 1,000 metric tons of gold — still a small fraction of government holdings in the U.S. and Eurozone.
Add in strong demand from gold-crazy consumers and “it’s safe to say demand still has a long way to go in China,” said Clark at Casey Research.
That’s created a huge opportunity for retailers. Hong Kong’s Chow Tai Fook plans to open 2,000 stores in China. The luxury brand already boasts revenue greater than Tiffany & Co. and raised $2 billion in an initial stock offering in Hong Kong in December.
But no gold merchant is better known in Beijing than Caishikou, whose core customers are working-class Chinese.
Formerly a traditional department store selling clothes and other goods, Caishikou now specializes in gold. It sells a dazzling array of ornaments and jewelry at prices that range from $63 chains to an elaborately detailed $135,000 dragon encased in glass. Everything is 24 karat, a prerequisite for Chinese buyers.
Fighting her way through the aisles recently was Li Jinfeng, a 45-year-old chicken farmer who had traveled from neighboring Hebei province to buy jewelry for her daughter’s dowry. Business has been good, and Li didn’t think twice about tapping her savings.
“In the old days, only the rich people in my village could have gold,” said Li, whose pierced ears were adorned with flower-shaped gold earrings.
Nearby, Li Lei, a 49-year-old retiree, was picking out a pair of bright gold rings to give her parents on their 50th wedding anniversary.
“I feel obliged to buy something nice for them,” Li said. “Money may lose its value, but gold will not.”