Huaan Asset Management Co. aims to attract as much as $400 million in initial funding for one of China’s first two gold exchange-traded funds as a drop in prices attracts buyers in the second-biggest consumer of bullion.
The product, to be listed on the Shanghai Stock Exchange, will track the performance of spot contracts on the city’s gold bourse, Xu Yiyi, the fund manager who will run the ETF, said in a telephone interview. Shanghai-based Huaan has yet to set a date to market the fund to investors, he said.
Gold sank into a bear market in April, after rallying for 12 years, amid bets the Federal Reserve may taper stimulus. While the rout hurt investors including hedge fund manager John Paulson and withdrawals from exchange-traded products set a record pace this year, many buyers in China viewed the slump as chance to stock up on jewelry, coins and bars.
“Gold hasn’t lost its appeal as a store of value in China,” Xu said on June 13 from Shanghai. “Investors here usually like to buy on dips, so a decline in the bullion prices this year should work in our favor.”
Gold for immediate delivery slid as much as 31 percent from a record $1,921.15 an ounce in September 2011 through April 16. Prices are down 17 percent this year to $1,391.22 at 11:13 a.m. in Shanghai. Gold of 99.99 percent purity on the Shanghai Gold Exchange traded at 277.39 yuan a gram ($1,408 an ounce).
Assets in global exchange-traded products backed by bullion fell 20 percent this year as some investors lost faith in the metal as store of value. Holdings in SPDR Gold Trust, the world’s largest bullion ETF, fell to 1,003.5 tons as of last week, the lowest since 2009.
Huaan and Guotai Asset Management Co. this month received the China Securities Regulatory Commission’s permission to start domestic ETPs backed by gold, which will be denominated in yuan.
“Gold-backed ETFs have been a huge success around the world since their introduction 10 years ago,” Albert Cheng, a managing director for the Far East at the World Gold Council, said in an e-mail on June 13. “Anything which makes it easier to access gold as part of a balanced investment and savings portfolio is a positive step.”
Huaan, which had considered starting a gold ETF for four years, ran into regulatory difficulty because of a rule prohibiting funds investing directly in physical commodities, Xu said. The company overcame this by linking the fund to contracts on the Shanghai Gold Exchange rather than bullion sitting in a vault, he said.
China Construction Bank Corp. will be the custodian bank for the ETF, with responsibility for ensuring that spot gold contracts are in place to back the fund, according to Xu.
Investors in Huaan’s gold ETF will be able to convert contracts into bullion through the Shanghai Gold Exchange under the framework of the gold bourse, he said.
— With assistance by Feiwen Rong