Gold News

Gold Hits China

China's rush to Buy Gold could have a big impact on international Gold Prices...

THE GLITTER of gold is gripping China.

   The launch of gold futures trading on the Shanghai Futures Exchange last week saw thousands of Chinese investors buy the precious metal contracts.

   Experts said the introduction of Gold Market futures will help make Shanghai the nerve centre of Asian financial markets.

   "Gold futures contracts will help expand the scope of the futures market," says Shang Fulin, chairman of the China Securities Regulatory Commission, "which is playing an increasingly important role in stabilizing the financial markets and serving national economic growth."

   In the first day of trading, the most actively traded contract for June delivery settled at 224.74 yuan ($30.90) per gram, up 6.34% from the opening price. The contract for delivery in December was 229.93 yuan ($31.60) per gram, up 8.86%. The total turnover of all contracts amounted to 27.3 billion yuan ($3.75 billion).

   The first deal was closed between China National Gold Group and Jiangxi Copper Company. Jiangxi Copper bought from China National Gold one of the new 1,000 gram contracts.

   Wang Chiwei, vice president of Jiangxi Copper, said he had been hoping for a long time to be able to hedge against Gold Price risks by trading gold futures in the domestic market.

   "As a company operating gold processing business, Jiangxi Copper needs a hedging tool to avoid risks resulting from price swings to ensure steady profits."

   According to Wang, it usually takes four months for a processor to refine copper concentrates into gold products for delivery. The low processing fee, at $5 per ounce, can easily be wiped out by a small movement in Gold Prices.

   "Without an effective hedging tool, the price movements at any time of the four-month work cycle will bite off a big chunk of the refining fee," Wang added. "The judicious use of gold futures in the domestic market trading in renminbi can enable Chinese enterprises to increase their competitive edge in the global market."

   Back when the global economy was strong, with stable currencies keeping inflation low, the Gold Market was stuck in the doldrums. Not anymore. The worsening US credit crisis, coupled with the weakening US Dollar and escalating oil prices in terms of all currencies, have driven Gold Prices to unprecedented highs.

   Last month, the international price of gold surged an aggregate 11.3%.

   Shi Min, president of Shandong Gold Group Co., says that the introduction of gold futures benefits numerous gold miners and processors in China, by providing an effective tool to hedge against price fluctuations. This is especially useful now the international gold market is showing increasing volatility.

   "The launch of gold futures is very timely," Shi believes. "When Gold Prices are touching record high levels, gold producers really need to hedge against high volatility resulting from sudden changes in market sentiment."

   Traders and industrial experts believe that the expected rise in China's gold output – as well as the surge in its gold consumption – would help the newly established futures market gain influence in setting global prices in the foreseeable future.

   Jeffrey Christian, president of CPM Group – a leading global commodities research and consulting company based in New York – told The China Daily: "China will be the largest producer of gold from mines, a major refiner, and a major user in fabricated jewelry. It will also become a major investment market. It will gain influence on Gold Prices.

   "Our expectation is that trading will start off relatively modestly in terms of volume, but could build later," said Christian.

   "Chinese market participants should remember that when US and Japanese gold futures trading began, in the 1970s and 1980s, their volumes were initially low, but later they became major markets. The same could happen, and may well happen, with China's Gold Markets."

   China is a major consumer and producer of gold. It was the world's third-largest gold producer in 2006, with aggregate output of the metal reaching 240.08 tonnes, up 7.15%. Last year, according to the GFMS consultancy in London, China overtook South Africa to become the world's No.1 gold-producing nation.

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