China's lucky balls

Rising demand can't be met by local mine supply. That means higher global prices...

Global Watch: 31st March 2007
A snippet from the latest weekly issue of GoldForecaster.com

LIBERALIZATION of China's gold market may be slow. But in today's gold market, it won't take huge tonnages to move the gold price.

   The Chinese need a bank account if they're to qualify to buy gold. This is how the Beijing government seeks to control the rising gold market locally. Now we hear from China that 90,000 bank accounts are being opened every day.

  
The Chinese public has indicated before that it would be happy to invest between 10% and 30% of its savings in gold, which people must now do through their bank and consequently the Central Bank.

  
We are not even going to try to put a figure on how much Chinese money will go into gold, but we have to highlight one fairly dramatic likelihood.

China's output cannot meet China's demand

   The People’s Bank of China is liberalizing to facilitate a professional gold market because local supply is being overtaken by demand. Even growing supply is not going to contain controlled demand. Gold will have to be imported in greater and greater quantities.

  
Demand to date has been met by local supply, so the global market has not seen any impact. The addition of Chinese production to total global output is primarily academic. It has not affected the gold price so far.

  
However, increasing Chinese demand for gold will draw off from external supplies. Unlike China's growing output, this will affect the global gold price.

  
In effect, Chinese demand above 240 tonnes has to be satisfied by the market. If demand doubles – and for a country that size in the process of enriching itself, this would not stretch credibility whatsoever – the next 240 tonnes will likely come from London.

  
This would draw off from other markets, taking the price upwards.

  
So now we can get enthusiastic about gold demand from China. Even relatively small quantities could push the price higher. In the South of China for instance, in Guangzhou, retail sales of gold coins and gold products have reached 7.82 tonnes since February. That would equate to 94 tonnes per annum.

  
What about the rest of the country? In Beijing, the northerly part of the country, a favorite piece of gold known as “lucky balls” is proving popular. These are one-gram balls, worn around the neck or wrist and are selling in their thousands.

  
The Chinese believe gold brings people good luck. It's also seen as a good investment. And in China, luck is a religion.

  
As China deregulates its precious metals market, says the central bank, it will gradually relax restrictions on the shipment and trading of gold. The nation wants to involve overseas investors, including banks, in gold trading. So says the People's Bank of China in its annual report on the financial market, posted on its website last week.

  
The statement gave no timetable for the changes. And at present, only China's four biggest commercial banks, together with some smelters and jewelers, may import and export gold. China also bars overseas investors from trading on the Shanghai Gold Exchange, which offers cash and cash-deferred contracts for 150 domestic banks, miners, jewelers and traders.

  
"Relaxing trade rules will boost imports as domestic production cannot satisfy demand," says Wang Xinyou, a gold trader at the Agricultural Bank of China in Beijing.

  
China's authorities want to make the exchange one of the world's leading gold markets, offering derivatives such as futures and options in addition to the current physical transactions.

  
For the entire report, please subscribe to GoldForecaster.com...