Hong Kong’s yuan-denominated gold trading slumped 78 percent from its January peak as bullion prices tumbled, sales at jewelry retailers slowed and the currency weakened, said the city’s century-old bullion bourse.
Average daily trading volume was 533 million yuan ($83.7 million) this month, compared with 2.38 billion yuan in January, Chinese Gold & Silver Exchange Society President Haywood Cheung said in a May 29 interview. Both months fell short of the 4.9 billion yuan target that Cheung announced when the contracts, about 80 percent of which are designated for physical delivery, were introduced in October.
Gold demand in China, the second-largest consumer, may stagnate this year, as declining prices put off investors and slower economic growth crimps sales, according to Lao Feng Xiang Co., the nation’s largest maker of gold jewelry. The attraction of holding yuan is also diminishing, with the currency having retreated 1 percent versus the dollar this month, the biggest loss since a peg ended in July 2005.
“Members aren’t willing to supply gold for physical delivery when gold prices are low,” Cheung said. “Goldsmiths are getting less renminbi because sales have slowed down. They might opt to deposit the yuan at banks instead of buying gold.”
The precious metal is set for a fourth monthly decline, the longest losing streak since 1999. Spot gold has fallen 6.2 percent this month to $1,561.93 an ounce as of 11:55 a.m. in Tokyo. The yuan-denominated gold contract in Hong Kong traded at 320 yuan per gram, or the equivalent of $1,424 an ounce, according to data on the Chinese Gold Society’s website today.
Offshore Yuan Hub
The society is in talks with refiners in the Middle East, Switzerland and the U.S. to boost the supply of gold available for trading in yuan, Cheung said.
The yuan-denominated gold contract is part of Hong Kong’s efforts to cement its status as China’s major offshore yuan trading hub as London gears up to compete. Hong Kong Exchanges and Clearing Ltd. plans during the next quarter to introduce yuan futures contracts that will be settled in the currency.
Yuan deposits in the former British colony fell for a fourth consecutive month in March to the lowest level since June as predictions for appreciation were reined in. Analysts forecast a 2012 gain of 1.8 percent now, a percentage point less than at the start of the year, based on the median estimates in Bloomberg surveys. This month’s sales of Dim Sum bonds, which are denominated in the currency, are the lowest in 21 months and the yuan touched this year’s low of 6.3731 per dollar today.
“Yuan appreciation is no longer the key but where is the best place for people to park their money?” said Cheung. “Investors will again take gold, or even silver, as safe havens as Europe’s debt crisis continues and there’s nothing to stop the U.S. monetary easing.”
The Chinese Gold Society, started in 1910, plans to start silver trading in yuan as soon as July, Cheung said, adding that he expects demand for precious metals to rebound in the second half. He estimates the gold price will climb from the third quarter and test the record $1,921.15 an ounce in the final three months of the year.
The Hong Kong Mercantile Exchange, backed by the world’s largest lender, began trading gold futures last May and silver contracts in July, both denominated in U.S. dollars. Those are the only contracts available. It said in March that it’s planning to offer gold, silver and copper futures contracts denominated in China’s yuan.
Hong Kong Exchanges is bidding for the London Metal Exchange, which handles more than 80 percent of global metals futures. The bourse should lose government protection against competition if it begins commodities trading, Hong Kong Mercantile Exchange Chief Operating Officer William Barkshire said in an interview this month.
“We fully support Hong Kong Exchanges’ bid for LME,” said Cheung. “It’s more about competition. Winning LME will help Hong Kong to develop commodity trading products for the Chinese market and build a bigger pie for everyone.”