World No.1 bank ICBC just signed a deal with the World Gold Council (WGC)...
WE RECENTLY WROTE about China and Chinese gold demand, describing the potential growth in the longer term, writes Julian Phillips at GoldForecaster.com.
Last week brought news, however, of new on-the-ground developments which, we believe, will make China the world's largest market for gold – the tie-up between world No.1 bank ICBC and gold-marketing group the WGC.
We have long maintained that China's gold market needs to be developed across the country and not just in the main centers. The elimination of the premium on the Gold Price out 'in the sticks' compared to the main centers will evidence that their gold market is maturing. And a simple press statement last week from the World Gold Council (WGC) hides what we expect will bring about countrywide interest in gold right down to the middle-class rural centers.
"The World Gold Council and the ICBC will explore and jointly develop new Gold Investment products tailored to the Chinese market, and conduct surveys and studies on the domestic retail gold investment market, facilitating financial innovation and product diversity...
"In addition, WGC and ICBC Precious Metals Business Department(s) will set up an ICBC/WGC Gold Business Strategy Board to discuss and plan strategies for their cooperation, as well as an Action Team to oversee the implementation of the decisions and initiatives adopted by the Strategic Group..."
They remain tight-lipped about what these products will be. Nor do they give out any information on potential products. At the moment, the mining-backed World Gold Council are saying only that the partnership came about as a "meeting of minds" between the WGC and the ICBC, part of a "shared vision". The products are under development right now.
However, a glance at just who these two bodies are gives us a clear direction on what to expect. Immediately, it's clear that this is a dynamic announcement and one that will, in time, impact heavily on the gold market internationally!
The World Gold Council's mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders – the major Gold Mining producer companies worldwide. How has it done this in the past?
The concept of the Gold ETF (exchange traded fund) first came from the WGC some 10 years ago. This led to five such funds, now holding over 1,320 tonnes of gold bullion in bank vaults across the world. This has to be the first point of departure in this new 'alliance'. From the Middle East eastwards, investors like to hold bullion itself and away from the banks and government eyes, but in China savings are held largely in banks making such developments easy to achieve.
ICBC, meantime, is the largest bank in the world. The largest commercial bank in China and also the largest bank by market value – and the most profitable commercial bank in the world – it serves this nation of savers, where households on average retain up to 40% of their income in bank-deposit accounts.
The ICBC bank is thus ideally placed to properly develop the Chinese gold market. By the end of 2009, it had 16,224 offices both in China and abroad, offering a wide range of quality financial products and services to 212 million individual customers and 3.63 million corporate clients around the world.
The full potential of the Chinese gold market can now be reached. Just last week, GM's Chinese operators announced a 300% profit. Such growth in the car market evidences the growth in disposable income. And within a decade, we expect two-thirds of China's huge population to be living in cities – and earning far more than they are today. Their savings will go into the main banks, and from there be attracted to the best investment products. To date investment choices have been extremely limited with straightforward savings leading the way. Carefully tailored Gold Investment products may well be attractive to such people.
New gold products will have to be tailored to the banking/savings environment and for home consumption. The branches of the ICBC bank reach into the far corners of China and will bring it an existing distribution system to the world of gold.
This project has the potential to 'mature' the gold world in China and help to raise the per capita gold holding from the lowest in Asia (at 0.26 grams per capita) to close to the norm in places like Hong Kong. This will involve at least a potential growth of up to ten times the present holding. Success will take the Chinese gold market on a rising slope from the current 347 tonnes annual demand to the world's main gold market, overtaking India (which peaked with 850 tonnes of demand) in the medium term. We think this will take less than 5 years. It took the Gold ETFs in the West three years to build to 1,300 tonnes.
We could see Chinese gold Exchange Traded Funds too, but the average saver in China does not have a strong financial product/stock exchange knowledge. Simply understood products will lead the way. In China there are already Yuan, US Dollar, Yen, Aussie Dollar, Hong Kong Dollar and Euro deposit accounts. So a 'gold' account at the local bank branch would be a small extension for the saver in your regular local bank savings account.
Expect products that are bank controlled, with lower purchasing costs, held in the bank for the investor. The main client base will likely be an existing ICBC users. Gold demand will, therefore, grow in line with the growth of the towns and cities and the Chinese middle classes. Just extending current growth levels into the future tells us such gold account growth will be dynamic and rapid.
No doubt the lead taken by the ICBC will be followed by the rest of the Chinese banks reaching all such clients in these banks throughout China. We have no doubt that this partnership with the World Gold Council has the potential of impacting the world's gold market to a far greater extent than the advent of the original Gold ETFs.
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