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Gold continues to rise and sparkle even as other asset values decline

GOLD sellers in China are basking in the yellow metal's sheen, profiting from its reputation as a safe haven in the world when other asset values are crumbling.

The Shanghai branch of China National Gold Group Corp teamed up with Bailian Group this month to expand its outlets from one to six to sell bullion bars in new ways.

"We want to grab a golden opportunity, riding on gold's strong momentum, to penetrate deeper into the Shanghai market," said Li Qingfei, general manager of China National Gold's Shanghai branch.

The company, which holds about 30 percent of China's gold mining reserves, already accounted for half of all the gold bars sold in the city before it teamed up with the Shanghai-based retail conglomerate.

As well as expanding, the company is testing the waters in Shanghai as the first in China to sell gold bullion using three different pricing schemes based on delivery times. Buyers willing to wait the longest pay the smallest premium.

Investors can pay a 10-yuan (US$1.46) per gram premium over spot prices at the Shanghai Gold Exchange with immediate delivery. Under the second option they can choose to pay a premium of 8 yuan per gram and take delivery a month later. The third option allows a buyer to pay a premium of 5 yuan and wait a year for delivery.

China National Gold, which accounts for about a fifth of gold output in China, is also offering buyers at least a 2-percent return in gold products to encourage them to wait a year for delivery. For instance, buyers can get a small 25-gram bar by buying 1,000 grams of bars for delivery in 12 months.

The company said it will introduce the pricing schemes nationwide if they are successful in Shanghai.

"Sales are extraordinarily hot, giving us full confidence that we will be extending this program to Beijing and other markets," Li said. "We are satisfied with our decision to use delivery times as a pricing innovation."

But what Li calls a golden opportunity comes at a tough time for most other industries, which are facing slumping demand, squeezed corporate margins and a steeper economic global contraction that the International Monetary Fund has called the "Great Recession."

Global recession

Both the World Bank and the IMF forecast a recession in the world economy this year, the first global contraction since World War II.

Developed markets like the United States, the United Kingdom and Japan are all projected to sink deeper into recession. China, the biggest economy to have avoided recession to date, is also confronting slower growth, with the World Bank this month lowering its forecast for the nation's economic growth to 6.5 percent.

Gold enthusiasts predict the yellow metal will be one glittering spot in a flat commodities market. Prices of energy, agricultural and base metals have all nose-dived since the commodity bubble burst in the second half of 2008, along with a slump in stock markets.

Gold, however, has seesawed, chalking up gains in the fourth quarter of 2008 as investors bet that massive government spending programs throughout the world would fan inflation.

Gold is considered a hedge against inflation and during bad economic times.

Gold on the New York Mercantile Exchange hit an 11-month intraday high of US$1,007.70 in February but failed to hold the key technical level of US$1,000.

Gold tumbled to about US$890 on March 18 before spiking to US$942 after the United States Federal Reserve announced it would buy as much as US$1.5 trillion in US mortgage bonds and Treasuries.

In the past year, by contrast, New York benchmark oil futures plunged to US$40 a barrel from a record US$140.

"Gold's support is less fundamental and more sentimental," said Sean Mulhearn, global head of origination and structuring of commodity derivatives at Standard Chartered Bank. "People buy gold because of a lack of confidence in other assets and in the economy."

Climbing price

Judy Zhu, a Standard Chartered commodity analyst in Shanghai, said gold will move even higher, mainly on an expected weakening of the US dollar.

Zhu said she forecasts an average price of US$975 an ounce for gold this year and an average of US$1,100 an ounce in 2010.

Chen Jiu, general manager of Shanghai Lao Miao Jewelry Co, said the higher gold price reinforces the perception that the metal has "lasting value."

Indeed, China Gold Coin Inc sold out bullion bars earmarked for the Lunar New Year in January within months.

Gold jewelers like Shanghai Laofengxiang Co and Lao Miao expanded into bullion sales years ago, anticipating a sharp rise in demand.

China was the world's second biggest gold market in sales in 2008.

It's not really surprising in a country where people have been gold lovers for centuries. In ancient times, rich families squirreled away gold bars, called "yellow fish" as a hedge against tough, uncertain times.

Today, many Chinese investors prefer to buy physical gold rather than invest in less expensive paper futures because they still want the bars in hand.

Shoppers and investors in China, including the Chinese mainland, Taiwan and Hong Kong, purchased gold jewelry, coins and bars totaling 432.1 tons in 2008, up 18 percent from a year earlier, the World Gold Council said.

The annual 66-ton increase easily exceeded the sales of the next two largest gold markets - Vietnam and Thailand, which each posted a rise of about 38 tons.

In the fourth quarter, Chinese shoppers still bought gold jewelry, even as consumers in the US, Italy and UK curbed their expenditures amid the economic downturn.

In contrast to those markets, Chinese gold jewelry sales are predominately high-grade 24-carat gold. The World Gold Council said sales of 18-carat gold in China actually declined last year.

Wang Lixin, general manager of the World Gold Council China, said the prospects for gold jewelry this year are hard to predict. If the domestic economic slowdown deepens, sales could be adversely affected, he said.

But on one point he has no doubts. "Investment gold bars will sustain their strong growth this year against the backdrop of a gloomy economy," Wang said.


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