Beijing and Shanghai— Gold might be a luxury most can live without when times are hard, butfor cautious investors in China, the world's top producer and consumerof bullion, it has become a matter of necessity.
Jewellery salesmight take a hit in China after prices hit a record high this week, butamid ongoing economic uncertainty many in the financial community stillprefer bullion to bonds, analysts said in comments made before therecord was struck.
The government itself - also looking for asafe haven for its foreign currency reserves - is also likely toincrease its gold holdings, which now officially stand at 1,054 tonnes.
“Consumptionin China is expected to rise, as it is supported by expectations ofinflation, and I also believe the government will increase itsreserves,” Yao Haiqiao, president of Longgold Asset Management, said.
Onlyaround 1.6 per cent of China's forex reserves is held in gold, and thatfigure is expected to rise, Sun Zhaoxue, chairman of the China GoldAssociation, said earlier this year.
While some have warned the price might not be sustainable, Chinese buyers are still expected to remain active.
“Consumersare sensitive about the prices, so rising gold prices will definitelyhit purchases in India and China. We have seen a rapid drop in India'sjewellery consumption in the first half so a similar story could behappening in China,” said Zoe Wang, analyst with Shanghai CIFCO Futures.
“But in terms of investment, purchases are rising, as more people are using gold as a hedging tool. Such purchases will obviously increase in China.”
Chinais already the world's biggest gold producer, and in the first half ofthis year, consumption of the precious metal also became the highest inthe world, overtaking India.
Albert Cheng, Far East managingdirector at the World Gold Council, said Chinese gold purchases forinvestment reached a record high of 70 tonnes in 2008.
Withjewellery sales expected to fall - even in the biggest market of China,the only one to show any growth in 2008 - it is investment purchasesthat continue to drive up prices.
“The Chinese buy more gold bars in banks while Indians buy more jewellery,” said Longgold's Yao.
While investors abroad warn $1,000 (U.S.) per ounce might not be sustainable, many in China are more confident.
“Justbecause the price is high they will not suddenly start selling,” saidChina Gold Association vice-chairman Hou Huimin. “There haven't beenany big changes in behaviour in China.”
With demand stillconsiderably higher than supply, there is room for more priceincreases, said Ellison Chu with Standard Bank in Hong Kong.
“Wewill see how this price level will affect the market but personally Ithink it can go higher. If the market gets used to this price level, Ithink it has the potential to move higher.”
Longgold's Mr. Yaosaid China's gold investors had already climbed on the bandwagon and,in the absence of attractive alternatives, were reluctant to jump off.
“Theherd mentality plays a big role in the Chinese imvestment market. Idon't worry about rising gold prices hurting people because Chinesepeople pursue products whose prices are rising.”
Further pricesupport was likely to come from the Chinese government, which isexpected to increase its gold reserves in the near future, Mr. Yaoadded.
Chinese investors have fought hard for the right to trade in new financial instruments and they are not likely to panic-sell their gold as a result of the price surge, Mr. Chu said.
“If you look at the stock marketin the last few months, there has been volatility and rumours, andpeople are looking for something more stable. They can expectcontinuous growth in gold. I think it is a good way for them to invest.”
Currencydevaluations, dramatic cuts in interest rates and the threat ofinflation have made gold one of the few attractions left in China,where investors have fewer options.
“I think as long as investment tools in China are fewer than in the western world, people will want to hold on to something.”