June 11, 2013

Growth in demand likely for world's second-largest gold consumer

China, the world's second-largest consumer of gold, announced that it has approved two new gold-backed exchange-traded products in June. The new ETPs will make it easier for Chinese investors to gain exposure to physical gold. Chinese investors face legal obstacles to buying foreign-denominated gold ETFs and, as a result, have been forced to satisfy their demand for physical gold largely by buying coins and gold bars. The new ETPs will make it easier for Chinese nationals to buy gold, and, as a result, will likely increase the worldwide demand for the precious metal.

The Chinese Securities Regulatory Commission granted approval to Huaan Asset Management and Guotai Asset Management Co.'s proposals to create new yuan-denominated gold ETPs. Both ETPs will trade on the Shanghai Stock Exchange.

Gold ETPs have been hugely successful in the West, offering an easy, liquid, transparent vehicle through which individual and institutional investors can gain exposure to gold. Currently, the world largest gold exchange-traded fund, SPDR Gold Shares (GLD), owns 1,009.85 metric tons of gold, though this is down somewhat from peak levels reached at year-end 2012.

Most analysts don't expect the new ETPs to have an immediate impact on gold prices, since funds aren't up and running yet -- and no one knows how soon they will be open to investment. Also, gold ETFs have been a drag on the market lately, as active investors have withdrawn funds in respond to falling prices. Late in May, Bloomberg reported that assets in gold ETFs contracted by 454.8 metric tons, exceeding the inflows into these funds for all of 2011 and 2012.

Yet longer-term, the gold ETPs likely represent a strong positive for the market, since they will facilitate buying from some of the world's most voracious investors.

Albert Cheng, managing director in the Far East for the World Council, told Forbes: "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. 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."