Will gold sparkle or lose its shine?
By Zhang Fengming |
March 7, 2011, Monday
|
Print Edition
Print Edition
WITH so many investors jumping on the gold bandwagon amid rising inflation and widespread unrest in Arab countries, the temptation to join the latest rush is no doubt high among Chinese people in a country that has cherished the precious metal for centuries.
But is it wise to buy now?
Analysts who track the gold market are mixed on the question.
Nicholas Kwan, Asia chief economist of Standard Chartered Bank, is part of the positive school of thought. He said gold will enjoy support this year whether the United States economy performs to expectations or not.
"If the US economy rises as expected, inflation could pop up as an issue to support gold prices," he said. "If the US economy grows weaker than expected, the greenback will lose ground and in turn lend a hand to gold.
"Gold is supported in either scenario," he concluded. "The uncertainty just lies in how much higher it can climb."
Natixis Commodity Markets Ltd, however, is not so sure.
"We continue to be perplexed by the strength of investment demand for gold in China," the London-based commodity broker said in a research report. "In theory, holding gold cannot protect Chinese investors from inflation. With the strength of economic growth, one would expect anti-inflationary policies to involve higher interest rates and a revaluation of the yuan.
"We do not believe that there will be enough demand, either fundamental or investment, to support gold prices this year," Natixis said.
Whichever way you lean, there's no doubt that gold has captured the headlines recently as inflation worries spread in Europe and Asia and as political unrest spread across north Africa and the Persian Gulf regions.
Gold futures last week shot up again past US$1,400 a troy ounce and managed to hold that key level even after a small pullback.
Gold rose to a record US$1,431.25 an ounce on December 7, a gain of 30 percent for 2010. The price is unadjusted for inflation.
The World Gold Council pronounced 2010 an "outstanding" year for gold, with demand strong in all sectors. The body said global demand last year rose 9 percent to a 10-year high of 3,812.2 tons, worth US$150 billion.
Much of the increase was credited to higher jewelry demand, strong sales momentum in China and other key Asian markets, and a shift by central banks to be net buyers instead of net sellers.
Last year, India and China, the world's two biggest gold markets, contributed 51 percent of global demand for jewelry, bullion bars and gold coins.
As far as China is concerned, the figures don't surprise me.
The Chinese have always held gold in awe. Yellow is a color that signifies royalty and auspiciousness.
The practice of stashing away so-called "little yellow fish," or small gold bullion bars, at home was a common practice among wealthy families in China before the founding of the People's Republic of China in 1949.
For decades following, bullion was off-limits to the public. In 2002 China began deregulating its gold market by officially setting up the Shanghai Gold Exchange. More recent relaxation that allows individuals to buy and hold bullion bars only added to the gold frenzy.
In 2010, China was the strongest market for gold as an investment. Demand for bars and coins shot up 88 percent to 179 tons.
At the same time, gold jewelry demand in China rose 14 percent to 428 tons. In the jewelry sector, demand was strong for 24-carat ''pure'' gold, suggesting that people are buying the gold for speculation as much as for adorning it as an ornament.
Inflation concerns
By contrast, gold jewelry demand in most Western markets is focused on 14-carat or 18-carat grade jewelry, with emphasis more on design.
Inflation worries are no doubt playing a role in China's demand for gold. The country's consumer price index, the main gauge of inflation, increased 3.3 percent in 2010, exceeding the central government's 3 percent target. Many people regard gold as a hedge against inflation.
China has raised interest rates three times and has raised the one-year benchmark deposit savings rate to 3 percent. But 3 percent means negative returns after January inflation was clocked at 4.9 percent.
Higher gold prices don't seem to damp public demand. It's common to see new mothers buying their newborn some item of gold as a keepsake for the future.
With Chinese stocks struggling and the property market subject to a government crackdown on speculation, gold as an investment tool takes on glittering prospects for many. For them, it doesn't matter that gold, historically adjusted for inflation, doesn't command the eye-popping returns that might be expected from record high prices.
Gold prices rise and fall with alarming regularity, yet gold fans remain addicted to the metal.
The WGC said Chinese demand this year is expected to increase because the nation's economic prospects remain strong. But the council didn't give any numbers for its price forecast.
The more pessimistic Natixis said it expects gold to average US$1,225 an ounce this year, down US$2 from the 2010 average. The commodity brokers paint an even bleaker picture for 2012, forecasting an average price of US$1,000.
A lot of people think of gold as a "safe haven" against inflation, but on an inflation-adjusted basis, gold's performance is not necessarily all that impressive.
So buying gold as a hedge against rising consumer prices may not be as wise as it sounds. Still, with limited investment channels in China, many people don't have a lot of options when deciding where to put their money, and there's no doubt that gold still casts an aura of security.
To jump or not to jump into the market?
The prudent investor will weigh the risks and probably be wise not to put all eggs in one basket. The goose that lays the golden egg today may be the goose egg of tomorrow.
But is it wise to buy now?
Analysts who track the gold market are mixed on the question.
Nicholas Kwan, Asia chief economist of Standard Chartered Bank, is part of the positive school of thought. He said gold will enjoy support this year whether the United States economy performs to expectations or not.
"If the US economy rises as expected, inflation could pop up as an issue to support gold prices," he said. "If the US economy grows weaker than expected, the greenback will lose ground and in turn lend a hand to gold.
"Gold is supported in either scenario," he concluded. "The uncertainty just lies in how much higher it can climb."
Natixis Commodity Markets Ltd, however, is not so sure.
"We continue to be perplexed by the strength of investment demand for gold in China," the London-based commodity broker said in a research report. "In theory, holding gold cannot protect Chinese investors from inflation. With the strength of economic growth, one would expect anti-inflationary policies to involve higher interest rates and a revaluation of the yuan.
"We do not believe that there will be enough demand, either fundamental or investment, to support gold prices this year," Natixis said.
Whichever way you lean, there's no doubt that gold has captured the headlines recently as inflation worries spread in Europe and Asia and as political unrest spread across north Africa and the Persian Gulf regions.
Gold futures last week shot up again past US$1,400 a troy ounce and managed to hold that key level even after a small pullback.
Gold rose to a record US$1,431.25 an ounce on December 7, a gain of 30 percent for 2010. The price is unadjusted for inflation.
The World Gold Council pronounced 2010 an "outstanding" year for gold, with demand strong in all sectors. The body said global demand last year rose 9 percent to a 10-year high of 3,812.2 tons, worth US$150 billion.
Much of the increase was credited to higher jewelry demand, strong sales momentum in China and other key Asian markets, and a shift by central banks to be net buyers instead of net sellers.
Last year, India and China, the world's two biggest gold markets, contributed 51 percent of global demand for jewelry, bullion bars and gold coins.
As far as China is concerned, the figures don't surprise me.
The Chinese have always held gold in awe. Yellow is a color that signifies royalty and auspiciousness.
The practice of stashing away so-called "little yellow fish," or small gold bullion bars, at home was a common practice among wealthy families in China before the founding of the People's Republic of China in 1949.
For decades following, bullion was off-limits to the public. In 2002 China began deregulating its gold market by officially setting up the Shanghai Gold Exchange. More recent relaxation that allows individuals to buy and hold bullion bars only added to the gold frenzy.
In 2010, China was the strongest market for gold as an investment. Demand for bars and coins shot up 88 percent to 179 tons.
At the same time, gold jewelry demand in China rose 14 percent to 428 tons. In the jewelry sector, demand was strong for 24-carat ''pure'' gold, suggesting that people are buying the gold for speculation as much as for adorning it as an ornament.
Inflation concerns
By contrast, gold jewelry demand in most Western markets is focused on 14-carat or 18-carat grade jewelry, with emphasis more on design.
Inflation worries are no doubt playing a role in China's demand for gold. The country's consumer price index, the main gauge of inflation, increased 3.3 percent in 2010, exceeding the central government's 3 percent target. Many people regard gold as a hedge against inflation.
China has raised interest rates three times and has raised the one-year benchmark deposit savings rate to 3 percent. But 3 percent means negative returns after January inflation was clocked at 4.9 percent.
Higher gold prices don't seem to damp public demand. It's common to see new mothers buying their newborn some item of gold as a keepsake for the future.
With Chinese stocks struggling and the property market subject to a government crackdown on speculation, gold as an investment tool takes on glittering prospects for many. For them, it doesn't matter that gold, historically adjusted for inflation, doesn't command the eye-popping returns that might be expected from record high prices.
Gold prices rise and fall with alarming regularity, yet gold fans remain addicted to the metal.
The WGC said Chinese demand this year is expected to increase because the nation's economic prospects remain strong. But the council didn't give any numbers for its price forecast.
The more pessimistic Natixis said it expects gold to average US$1,225 an ounce this year, down US$2 from the 2010 average. The commodity brokers paint an even bleaker picture for 2012, forecasting an average price of US$1,000.
A lot of people think of gold as a "safe haven" against inflation, but on an inflation-adjusted basis, gold's performance is not necessarily all that impressive.
So buying gold as a hedge against rising consumer prices may not be as wise as it sounds. Still, with limited investment channels in China, many people don't have a lot of options when deciding where to put their money, and there's no doubt that gold still casts an aura of security.
To jump or not to jump into the market?
The prudent investor will weigh the risks and probably be wise not to put all eggs in one basket. The goose that lays the golden egg today may be the goose egg of tomorrow.
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