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UPDATED: Chinese ETPs Expected To Further Boost Gold Demand

By Allen Sykora and Neils Christensen of Kitco News
Monday June 10, 2013 2:16 PM

(Updating earlier story to include additional comments from analysts)

(Kitco News) - Most analysts figure the approval of two gold-backed exchange-traded products in China should mean added demand for the metal in one of the world’s largest gold-consuming nations on a longer-term time horizon.

The Chinese Securities Regulatory Commission approved the launch of yuan-denominated gold ETPs to Huaan Asset Management Co. and Guotai Asset Management Co. The ETPs will trade like stocks on the Shanghai Stock Exchange but track the movement of spot gold on the Shanghai Gold Exchange, said representatives of Huaan and Guotai.

Although the announcement of two new funds was described as bullish for the yellow metal, analysts do not necessarily look for it to translate to another rally in the near term. For one thing, news reports do not say when the ETPs will be launched.

“I don’t think this product will help bring back the gold fever we saw five years ago,” said Mathieu D’Anjou, senior economist at Desjardins Economic Studies.

China was the world’s second-largest gold consumer in 2012, according to data compiled by the consultancy Thomson Reuters GFMS for the World Gold Council’s quarterly demand trends reports. Chinese demand last year was 776.1 metric tons, behind only India’s 864.2.

Societe Generale metals analyst Robin Bhar commented that gold ETPs have been a “huge success” in Western nations, despite heavy redemptions so far this year, and presumably will attract a following in China as well.

The Web site of the world largest gold exchange-traded fund, SPDR Gold Shares (GLD), lists holdings of 1,007.14 metric tons, although this is down from 1,350.82 as of the end of 2012 as some investors have liquidated holdings.

A Barclays research note said global ETP holdings of gold have fallen nine metric tons so far in June after a 131-ton outflow in May.

“It’s been a fantastic vehicle for both institutional and retail investors to gain exposure in a low-cost way to the gold market,” Bhar said. He also looks for the ETPs to further “stoke” demand in China, but added that much will hinge on the performance of the price of gold itself.

“I expect this will be a very welcome and successful product,” he said. “If the fee structure is similar to the GLD product in the U.S. or other ETPs that have been launched in Europe, there is no reason why this shouldn’t foster growing demand in China for gold.”

The World Gold Council looks for the ETPs to become popular in China. The Council, a market-development organization for the gold industry, helped develop the first gold exchange-traded funds in the U.S. and elsewhere and also said it played a role in China. 

“Gold-backed ETFs have been a huge success around the world since their introduction 10 years ago, and anything which makes it easier to access gold as part of a balanced investment and savings portfolio is a positive step,” said Albert Cheng, managing director in the Far East for the World Gold Council “The listing of these products in China will help to broaden the choices available to savers, and have been long anticipated by many market watchers. We have shared our expertise in developing these products with a number of interested parties in China, and we look forward to the popularity that these funds have achieved elsewhere being replicated in one of the world's largest markets.”

Carlos Sanchez, director of asset management with CPM Group, said he also looks the products to mean further gold demand in China but for the ETP buying itself to be modest to fair. The Chinese ETPs may not take off as quickly as the first gold and silver ETPs in the U.S. due to the market itself, he explained. The first U.S. gold and silver ETPs were launched in the midst of a decade-long bull run, he pointed out. Some investors jumped in to benefit from the rising price environment. However, gold is now more than $500 below its peak from September 2011.

Still, on a longer-term basis, Sanchez said he looks for interest in Chinese ETPs to pick up if prices pick up again.

“We’ll have to see what the small (Chinese) investor’s preferences are. Demand is typically strong for physical bars and coins,” Sanchez said. Thus, time will tell whether Chinese investors want to hold physical metal themselves or will turn to the ETPs.

D’Anjou said that although the funds will make it easier to invest in gold, it is too early to determine if they will be well received.

“I think we have to wait and see who will buy these products. At the moment I don’t think there is a rush to buy ETFs, but that might change,” he said.

Jeffrey Nichols, senior economic adviser to Rosland Capital and managing director of American Precious Metals Advisors, said he sees some positives for gold but added that the news is not a very big surprise.

“These funds have been in the works for a while and I think everyone knew they were coming,” he said. “This securitizes gold and makes it more accessible to more people.”

Nichols said that a major benefit of the new funds is less volatility in the marketplace. He said because of the cultural importance of gold in China, investors in the country could be less likely to sell their shares of the new fund, unlike many Western investors who see GLD strictly as a speculative trade.

Nichols said that he doesn’t see the new funds as a “game changer” because demand for physical gold, which has been fairly strong, could start to drop as investors instead opt to buy shares of the new funds.
“I think we can expect that some will use it as an easy alternative to buy gold,” he said.

As to what will help drive prices higher, Nichols said it is still all about inflationary expectations. If the U.S. economy starts to slow again, he said markets will expect the Fed to be more accommodative, which will make gold more attractive.

By Allen Sykora and Neils Christensen of Kitco News; asykora@kitco.com and nchristensen@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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