The Gold-Rush is on in China

04/30/2008 12:00 am EST


Vivian Lewis

Editor and Publisher, Global Investing

The consumption craze in China is far from over and the demand for gold continues to heat up, says Vivian Lewis, editor of Global Investing.
After 2001, China became the 4th biggest gold consumer market after India, the US, and Saudi Arabia. In China, gold jewelry accounts for 96% of the overall gold market. A large-scale survey of Chinese in 10 big cities showed that 80% of them purchase jewelry for decoration and only some 11.1% for storing value.

Contrast Japan, where only 20% of gold is bought for decoration or jewelry. After 1949, gold trading was suppressed by Beijing for over 50 years. Mao in 1950 turned over the management of gold and silver to the People's Bank of China. It alone was allowed to purchase precious metals. This froze the popular gold business. Furthermore, in 1963, China stopped supplying raw gold for making jewelry. Exports of gold and silver were blocked. So the Chinese and gold were separated for almost 40 years.

In 1999 China opened the silver market. In 2001, China cancelled the gold fixed rate set by People's Bank of China, and implemented a weekly market price tracking international markets. In 2002, the People's Bank of China authorized four large banks to perform services to the gold industry: gold spot transactions; gold transaction overview; gold project financing; gold material completion; gold lending and borrowing; gold purchase; and setting up retail gold investment products for sale to Chinese residents.

In 2002, the Shanghai Gold Exchange opened on the Bund and China Foreign Currency Trading Center officially began. On day one there were 98 transactions for 540 kilograms, valued at 45.08655 mn Yuan ($5.4584 mn). A recent survey showed that 40% of Chinese families with income over 3,000 Yuan want to buy gold.

There is nothing modest about showing off your wealth in today's China. Restaurants all over the country offer special show-off menus of pricey food and wine for parvenus to impress their friends or business associates. Gold and silver have become the "in" gift for Chinese New Year among the nouveau riche. 

The government tried to stop speculation in gold. It limited New Year's greeting money bars this year to Rats weighing no more than 8,000 spindles. China's gold trades at world prices. So there is no reason to buy into a Chinese goldmine. Instead, put your money into gold ETFs. We recommend Streettrackers Gold (NYSEAraca: GLD) and iShares Comex Gold (AMEX: IAU).

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