The attention of the global gold market shifted decidedly eastwards in 2013 when China passed India as the world’s biggest buyer of physical gold after bargain prices sparked a buying spree. Although sales were hit last year by Beijing’s anti-corruption campaign, it does not appear to have dulled the precious metal’s historic appeal to the Chinese as a store of value.
Part of this enthusiasm is down to property and alternative investment products becoming less attractive, which has prompted Chinese households to increase holdings of gold in their portfolio allocation. The steep fall of currencies that have been popular with Chinese venturing overseas – from Australian and Canadian dollars to even the Euro – has further burnished gold’s appeal as a safe haven.
Meanwhile, another reason China’s influence on gold is set to grow comes from its ongoing financial liberalization. Financial institutions are widening the limited domestic savings choices to include gold-linked investment products. Ongoing efforts to open the capital account mean that Chinese gold demand will increasingly feature in determining international pricing.
CME Group is positioned for this market shift after launching its first physically delivered Gold Kilo futures contract in January 2015. To understand more about this new product and the appeal of gold to Chinese and Asian investors, we sat down with Harriet Hunnable, Executive Director, Precious Metals and Yvonne Zhang, Director, Metals Products, Asia, at CME Group.
In 2014, China lost its number one spot to India as the biggest physical gold consumer. How would you assess the long-term outlook for Chinese gold demand?
Yvonne Zhang (YZ): In the current climate of slower economic growth, Chinese demand is driven by disposable income rather than the investment-driven euphoria witnessed in 2013. While demand has stalled for the high-end ostentatious spenders, gold is still popular with Chinese households who practice a “buy and hold” mode of saving, particularly given the prevalent anxiety about the property market. We should take note that outside of China, the appetite for gold has grown strongly in 2014 with a surge in demand across Thailand, Korea and Singapore.
Given this demand in the rest of Asia and especially India, how important is it to have a gold contract in this region?
Harriet Hunnable (HH): – I think gold demand volumes are now so significant in China and Asia that it is important to capture these specific price signals. There is certainly a need to have a futures contract that better reflects China, is locally relevant and accessible, and provides a valid reference point.
There have also been more moves by China to open its capital markets, such as with the establishment of the Shanghai Gold Exchange International Board last year. We want to be part of this by providing a regional contract that can be traded on our global platform. Any developments that provide more information and price indicators to the market are a good thing.
Why did you decide now was the right time to launch your gold contract?
HH: As well as the physical growth of demand in Asia, we also had to make sure it was feasible to set up the vault infrastructure in the region. This took a lot of preparation. This is our first deliverable gold contract outside the United States and COMEX requirements are strenuous and quite significant.
We always knew a paper gold contract would not work here because it needed to have the attributes of a physical contract, with price convergence with the physical market. In 2012-13, we saw huge movements in the premium in this region, and last year much more physical inventory became available.
What type of participants do you expect for this new contract?
YZ: Our early adopter clientele are banks, proprietary trading houses and commercial traders. As the contract gains momentum, we expect participation from asset managers, funds and high net worth individuals.
The steep correction in gold from its 2011 all-time high ended some investment interest in the yellow metal. But now with gold stabilizing between $1200-$1300, are there signs of interest returning?
HH: Recent activity shows that there is still significant interest to trade gold as it is very useful if you are looking to trade around risk events. It can be a good proxy for hedging against say the Euro decline, or perhaps for those looking to trade the local currency complexion of the RMB. There was inevitably a shake-out of highly speculative investment after the gold correction, but we have seen some major players back in the gold market in the past one to two months.
YZ: For the China market there was an overhang of supply after the voracious buying in 2013, which was a factor keeping purchases subdued. On the other hand, because gold funds and ETFs are less developed in China, there was not the same fallout from the gold price correction. But we can expect gold related financial products to be a source of growth in China. There has recently been a surge in Chinese banks, insurance companies and investment trusts offering innovative gold savings products, such as physical gold funds and even ETFs.
Looking forward, with pivotal reforms such as gold trading in the new Shanghai Free Trade Zone with plans announced to launch a yuan-denominated gold fix this year, can we expect to see China setting global price benchmarks?
YZ: A global benchmark is very much a democratic concept. It is defined by market wide acceptance and active usage. To achieve benchmark status, you need international players to gain unfettered access to onshore markets, and domestic players to freely trade with overseas counterparties and do so with reasonable efficiency.
The moves by China to liberalize its capital account with the launch of three additional free trade zones modeled after Shanghai, and RMB internationalization plans, are clearly moves in the right direction. 2015 is an important year as many of these policy initiatives will be implemented, and the winds of change are certainly coming.