Why Gold Remains Valuable to Chinese Investors

Gold is a relic that has withstood the test of time. It fulfilled various roles, initially as ornamentation and jewellery and also as a means of exchange and a store of value and wealth – it became a medium to facilitate global trades and finance.

Consequently, gold played a big role in shaping global powers. Its appeal is heavily embedded in the culture, religion and life of developed and developing economies.

Gold remains a crucial asset in an increasingly challenging global economy that must grapple with growing inflation, the deteriorating value of fiat currencies, negative government bond yields, the potential nuclear war and other geopolitical tensions.

Chinese Aunty And Gold’s Return

“Chinese aunty,” a term coined for wealthy Chinese citizens with excess savings to invest, was the powerhouse in the rally in gold prices in 2011-2013.

Global physical investment peaked at 1,702 tonnes in 2013 – China accumulated more than 407 tonnes that year, according to data from Metals Focus. The lack of alternative wealth management assets had raised the appeal of the yellow metal.

But interest in gold has declined since 2013 – hot money from Chinese aunty shifted from the yellow metal into Chinese stock market. But the stock market rally proved rather short-lived – in June 2015, Chinese investors suffered huge losses, which has burnished gold’s profile as a safer long-term investment.

China’s robust economic growth over the past two decades has gone hand-in-hand with the nations’ accumulation of gold – reserves were an estimated 1,842 tonnes in 2017, according to World Gold Council statistics. With 1.37 billion people and the abolishment of the one-child policy, China will remain a major consumer of gold in many years to come.

The changing perception, attitude and knowledge of Chinese consumers meant that gold has attracted investors with a longer-term view. Gold is increasingly in demand by sophisticated and high-net-worth investors seeking to protect their wealth against further yuan devaluation.

Even though President Xi Jinping struck a confident tone at the 19th Communist Party Congress held in October this year about bringing China into the “new era”, there are many financial and political challenges ahead. The overinflated property market, overcapacity, pollution and debt to GDP are just some of the uncertainties that Chinese citizens face. So exposure to gold investment products either through futures or physical assets remains essential.

More Accessible Than Ever

Many think a balanced investment portfolios should include 5-10 percent of wealth in gold because it acts as a financial hedge against global risks and uncertainties. Technological advancements in the 21st century such as the internet have made gold investments much more accessible for new and old investors. Indeed, there has been a structural shift in global consumption, with gold moving from the west to east to wherever wealthy and risk-averse consumers demand it.

There are different types of gold investments. Chinese investors prefer to own physical gold in the form of bullion coins, bars and jewellery, data shows. Global growth in physical investment is set to rise 5 percent in 2017, according to forecasts from Metals Focus, with Chinese apparent demand the largest contributor to this increase.

But there are downsides to owning physical assets including storage costs and the risk of theft or loss.

Futures and options offer an alternative to holding physical gold – they reduce the costs and risks associated with physical assets because an investor does not have to take delivery of and store those assets.

Gold may be an ancient relic but its value and status remains very much relevant, dynamic and far more superior than the many Chinese dynasties before us. Gold investments will grow in importance in China for many years to come.

Andy Farida is a Commodities Research Analyst at Metal Bulletin.

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