Energy & Resources

Golden chance

Falling gold price attracts mass Chinese buying

Golden chance

Early this year Fujian tycoon Wu Duanbiao grabbed headlines when he threw a lavish wedding for his daughter. But what really caught attention was the generous dowry. The lucky couple received around $150 million from the doting parents, which included four large boxes of gold jewellery.

Wu may now be wishing that the wedding had been delayed a few weeks, giving him the chance to buy his wedding bullion at a knockdown price.

Gold has long been a popular choice for wedding gifts in Chinese culture. That explains why millions of eager parents rushed to jewellery shops last week as prices for the metal dropped to their lowest level in nearly two and a half years.

“A dowry is something you know you will need and I don’t think there’ll be an opportunity like this for a long time,” a woman from Zhejiang told the South China Morning Post.

Bargain hunters also took advantage of the drop in prices, with a surge in investment in bullion around the country.

A total of 20 kilograms of gold bullion – worth more than Rmb6 million ($970,000) – sold out within two hours on Saturday morning at Beijing Guohua Department Store, CCTV reported.

Hong Kong also saw a huge spike in jewellery sales. Customer traffic rose by as much as a quarter early last week, says Chow Tai Fook, the world’s largest jewellery chain. Buyers from China prefer to buy gold in Hong Kong because they are worried about the metal being adulterated at home.

Traders reported a similar surge in business. “We were doing about $1 billion in sales but on Friday (April 19) it moved to $12.8 billion, and by Monday, it was tremendous – it went up to $20 billion. On the bullion side, we sold out at the weekend – one tonne of gold bars,” reported Haywood Cheung, president of the Chinese Gold & Silver Exchange Society, adding that buyers see gold as a more stable investment than the stock market.

The Nanfang Daily struck a more sobering note, warning investors against charging blindly into the buying frenzy. A piece of gold jewellery costs around Rmb350 per gram at retailers, the newspaper suggested, while the cost of gold bullion at a similar weight is only around Rmb295. From an investment perspective, buyers should be careful about what they are buying.

Meanwhile, strong demand for gold from China and India saw record sales over the week, prompting some analysts to claim that prices for the metal have bottomed out.

“In view of the strong demand for physical gold, the possibility of a further substantial plunge is small,” Zhang Bingnan, vice chairman of the China Gold Association, told the Global Times.

Hedge fund manager John Paulson concurs (that’s no great surprise, as he is heavily invested in the metal), telling clients that purchases by central banks and demand from Asia will support prices in the near term.

But if gold prices continue to decline, even strong demand at home is unlikely to buoy up the Chinese gold mining sector. Fujian-based Zijin Mining, China’s largest listed producer, was sitting on a gold pile worth Rmb11.6 billion as of the end of last year.

But analysts say Zijin will have to undergo a major markdown should prices continue to drop. Over the last two weeks the company’s stock fell around 13%.

“It is undeniable that dramatic changes in the price of gold have put enormous pressure on the company’s inventory. Although there is no stress at the moment to sell down the inventory, there is a lot of downward pressure on gold prices. That means mining firms with gold reserves will be forced to substantially mark down their inventory,” an industry researcher told 21CN Business Herald.

However, Zijin says it has no intention to lower production. A company spokesman told Shanghai Securities News that Zijin’s balance sheet will also withstand the downward pressure on price. “We need to find a way to reduce cost rather than cut down production,” the company advised. In fact, the fall in prices may offer Zijin a buying opportunity. It and state-owned Shandong Gold have been expressing an interest in acquiring smaller, cash-strapped miners. This week Securities Daily reported that the two large miners are also looking into buying three gold mines in Western Australia, put up for sale by Barrick Gold Corporation.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.