Gold No Slam-Dunk Sell in China as Aunties Buy Bullion

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A shop assistant displays gold bars at a gold shop in Beijing. Close

A shop assistant displays gold bars at a gold shop in Beijing.

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Source: AFP/Getty Images

A shop assistant displays gold bars at a gold shop in Beijing.

Yang Cuiyan, a 41-year-old housekeeper from Anhui province, is one reason China is poised to topple India as the world’s top consumer of gold even as investors desert the metal.

Standing outside Beijing’s busiest jewelry store, wearing a thick coat against the autumn chill, she clasps a gold necklace that cost her 10,000 yuan ($1,640), or five months’ wages.

“I don’t know anything about the stock market and I don’t have enough money to buy property, so I figured gold is the safest choice,” she said. “I can put it on when I go back home to show everyone that I’m doing well.”

Yang, who made the 650-mile (1,000-kilometer) journey to the capital from her rural home to visit relatives and shop, is one of the legions of middle-aged Chinese women, respectfully referred to as aunties, who bought coins and jewelry this year, bringing support to a market shunned by many professional investors who began doubting the metal as a store of value.

Bullion consumption in the world’s second-largest economy will surge 29 percent to a record 1,000 metric tons in 2013, according to the median of 13 estimates from analysts, traders and gold producers in China surveyed by Bloomberg News. Demand that may ease 2.4 percent in 2014 from this peak still points to purchases greater than any other nation and more than the U.S., Europe and the Middle East combined.

China’s demand for jewelry, bars and coins rose 30 percent to 996.3 tons in the 12 months to September, while usage in India gained 24 percent to 977.6 tons, according to the London-based World Gold Council. India was No. 1 for calendar 2012.

‘Slam Dunk’

Images in Chinese media of aunties clearing shelves in gold shops after a 14 percent plunge in prices in two days in April illustrate an appetite for bullion that defies the views of the biggest banks in the West and points to limited investment choices in China. Warren Buffett, the world’s most successful investor, said the metal has no appeal, and Jeffrey Currie, the Goldman Sachs Group Inc. commodities research chief who correctly forecast the rout this year, on Oct. 8 called it a “slam dunk” sell for 2014.

“In China, you look around and see very few places to put your money,” said Duan Shihua, a partner at Shanghai Leading Investment Management Co. “With the share market down and the government nudging people away from real estate, gold will remain a favored choice.”

Price Forecasts

Bullion is 34 percent below the record set in 2011 and on course for its first annual loss since 2000 after falling 24 percent to $1,276.64 an ounce in London this year. The Standard & Poor’s GSCI gauge of 24 commodities fell 5 percent since the end of December, and the Bloomberg U.S. Treasury Bond Index lost 2.1 percent. While the MSCI All-Country World Index of equities surged 18 percent over the same period, the Shanghai Composite Index slumped 3.4 percent.

Bullion will average $1,175 in the third quarter of next year, according to the median of estimates from the 10 most-accurate precious metals analysts tracked by Bloomberg in a survey published last month. Prices were last at that level in 2010. Goldman expects prices at $1,050 by the end of 2014.

China’s rural per capita cash income in the first nine months jumped by 12.5 percent from a year earlier, while urban per capita disposable income rose 9.5 percent, data from the National Bureau of Statistics shows. The economy will grow 7.6 percent this year and 7.4 percent in 2014, according to the median of estimates compiled by Bloomberg.

The nation ranks fourth worldwide for people with $1 million or more in investable assets, after the number of high-net-worth individuals in the country rose 14 percent to 643,000 last year, according to a report by Cap Gemini SA and Royal Bank of Canada. The U.S. ranks first, followed by Japan and Germany.

Bearish Signs

Policy makers clamped down on property investments in March to cool the housing market, ordering the central bank to raise down-payment requirements for second mortgages in cities with excessive cost gains. New home prices in China’s four major cities in October jumped the most since January 2011, the National Bureau of Statistics said yesterday.

Societe Generale SA, which correctly predicted gold’s slump this year, sees prices averaging $1,125 next year, the lowest since 2009, because an eventual slowing of U.S. stimulus as the economy strengthens will cut demand. Credit Suisse Group AG forecasts an average of $1,180 for next year and $1,200 for 2015. Bank of America Corp. is more bullish, predicting $1,294 in 2014 and $1,356 the year after. Barclays Plc predicts China’s demand growth will slow to 5 percent next year from 15 percent this year.

Fed Easing

“The Federal Reserve will eventually reduce quantitative easing and that will drive up bond yields there,” said Wang Weimin, a gold analyst at Dalian Fortune Futures Co. in Dalian, northeast China. “Funding costs have been rising inside China, all bearish for investment in gold.”

The premium to take immediate delivery of gold in China has declined to $1.30 an ounce from an average of $19.70 this year and a record $109.29 in April, according to data from the Shanghai Gold Exchange. Any annual decline in Chinese consumption would be the first since 2002, when the government lifted a ban on bullion trading and opened the Shanghai bullion bourse.

While China overtook South Africa to be the world’s largest gold producer in 2007, domestic output failed to keep up with the nation’s consumption, said Shanghai Leading Investment Management’s Duan. Production of 403 tons in 2012 compares with domestic demand of 776 tons, according to the China Gold Association.

Imports Surge

Net gold imports to China via Hong Kong more than doubled to 826 tons in the first nine months of the year, according to data from the Hong Kong Census and Statistics Department. Global gold ETP holdings tumbled 29 percent this year, reaching the lowest since 2010 last week, while more than $64 billion was wiped from the assets, data compiled by Bloomberg show.

China may allow more companies to import and export gold next year as it seeks to open its financial markets, according to draft rules released by the central bank on Sept. 30. It’s considering allowing foreign financial institutions and companies that produce more than 10 tons of gold a year to import and export.

“We can’t sell gold now in China produced in our overseas mines,” said Lan Fusheng, vice chairman at Zijin Mining Group Co. (2899), China’s largest gold miner by market value. “We would definitely welcome this change.”

The company has projects in Tajikistan and Australia and produces 6 tons to 7 tons outside of China annually, Lan said.

Government Reserves

The People’s Bank of China, which imports gold for foreign-exchange reserves, hasn’t given an update on its holdings since April 2009, when they stood at 1,054 tons. China’s government may have accumulated about 300 tons of gold to diversify the state reserves during the first six months of the year, said Philip Klapwijk, the founder of Precious Metals Insights Ltd., who spent 25 years monitoring the market.

Central banks added almost 535 tons to reserves last year, the most since 1964, and may buy a further 350 tons this year, the WGC estimates.

Russia raised bullion reserves about 57.4 tons this year, while Kazakhstan added 20.3 tons and South Korea’s climbed by 20 tons, according to Bloomberg calculations based on International Monetary Fund data.

In Shanghai, China’s center for gold trading, Malca-Amit Global Ltd. said it opened a vault this month big enough to store 2,000 tons of the metal, as well as diamonds and jewelry. The company’s Hong Kong facility, which can hold 1,000 tons, opened in September.

“I don’t want to put my money in a bank,” said Yang, the auntie from Anhui. “I want to keep up with my relatives and friends back home. We all like to compete to see whose necklace is thicker.”

To contact the reporter on this story: Feiwen Rong in Beijing at frong2@bloomberg.net

To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net

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