China retail speculation adds risks to gold price

October 9, 2009

goldAs gold prices surge to a new record, China’s retail investors are trading more of the yellow metal, often using borrowed money. This is further evidence that recent high prices may not be sustained.
Like investors around the world, Chinese individuals are buying gold because they are worried about inflation. After all, Beijing has already pumped an unprecedented amount of money into the system, sending asset prices higher. But Chinese retail investors are also known for their herd behaviour. Despite the recent sharp rise in gold prices, many have decided to jump in.

This is lucrative business for Chinese banks. During the first six months, mid-sized Xingye Bank, which offers gold trading business with Shanghai Gold Exchange, traded 20.9 billion yuan ($3 billion) worth of gold for its clients, almost three times as much as they did last year.
Other than earning a commission for buying and selling for their clients, the bank is also making a gamble itself. It traded 15.3 billion yuan ($2 billion) worth of gold on its own account, up 15 percent from last year.

Risks can be big for Chinese investors. Like most retail investors, they are often at a disadvantage to international institutions because they lack up-to-date information. Moreover, big price changes in global markets often happen when China is asleep.

A greater source of concern, however, is that investors are placing leveraged bets. Leverage is not allowed in China’s stock market, that’s why people eager to maximize their returns have flocked to gold trading. At Xinye Bank, customers are allowed to borrow as much as 90 percent of the value of the gold contracts they are buying. Investors are also allowed to sell gold short, though most of them are choosing to place long bets. It is not uncommon for investors to use three to five times of leverage.

The risk does not stop with Chinese individuals, however. What happens in China can have a significant influence on world prices. China, already the world’s biggest gold producer, has also become the precious metal’s biggest consumer, overtaking India in the first half of this year.

Chinese gold purchases for investment reached a record high of 70 tonnes in 2008. That is 6 percent of the global amount which includes the sort of bullion, official coins and metal for investment purposes, according to the World Gold Council. Globally, retail demand for investment purposes increased 72 percent in 2008.

There are plenty of legitimate reasons for investors to buy gold. It is a hedge against inflation, and the ultimate store of value. But gold is just as prone to speculative bubbles as other asset classes — particularly if investors are leveraging their bets. China’s bullish retail investors are another reason investors should be wary about the latest gold price surge.

Comments

Informative news story and to the point. I am curious as to why the Chinese regulators would permit the chinese banks to lend as much as 90 percent of the current market value of the asset? Are they physically buying gold and storing it in the bank?

Posted by John Whyms | Report as abusive
 

China and india including pakistan bangladesh ,comprise world 50% population–highly conservative and have in their genes the wisdom of horading Gold as `real money`.This has been there since 3000 years or more.Any amount of propagation of paper money through financial wizards or governments can not change the psyche of htis large bloc of people.Gold has to move to 2500 usd/oz to effect the giant buying trend that has set in.Many guys having bought at usd 600 around are not selling as they do not know what to do buy with money received.Gold looks like a safe bet to tackle hugh inflation which will hit food prices like a earthquake hit region.

Posted by DESH BHUSHAN | Report as abusive
 

True, the leveraged gold buying is increasing the risks of a sudden correction, but with low interest rates now seen in most countries, a gold carry trade is in the works. China will be forced to buy even more dollars to prevent or reduce the effects of de-leveraging that continue mainly unabated.

Posted by Rick Friedl | Report as abusive
 

Nothing is more of a “speculative bubble” than the fiat US dollar….overvalued and kept afloat by the central banks that continue to warehouse the wasting asset greenback.
Relative to the global inventory of gold . the ocean of printing press currency is growing at gallop.

leveraged speculators are always at risk , but sensible investors will fare very well with gold.

Posted by robert casidy | Report as abusive
 

I own 1000 tr. oz of gold, maples amd eagles. I bought it in the mid-80′s and it took forever to go up. Now it’s the best thing I ever did.

Posted by WILLIAM J DONOHUE | Report as abusive
 

I would have been surprised if someone, somewhere,hadn’t penned an article like this. Whenever any asset advances strongly in price, there’s always somebody who comes out with warnings about a likely downturn. Mind you, the issuer of such warnings NEVER tells you when he thinks the downturn will occur. It’s all left comfortably vague. That way, if no downturn occurs in the short term, he will always be able to say “I didn’t say WHEN.” And when the downturn actually materializes, as it inevitably will (since all that goes up will come down), even if that takes three years to occur, he will inevitably point smugly to today’s warning and say “See. I told you so.”
Honesty, one can easily get fed-up with this sort of literary output, which totally ignores cycles, trends and history in general, and which therefore does nothing but try to sow seeds of disquiet even though no disquiet is genuinely relevant to the current situation.
Sincerely
Mike

Posted by Mike Altmann | Report as abusive
 

Retail speculation will not be the only risk to the gold price .

Posted by No.oooo | Report as abusive
 

中国你好

 

Yes, it is true.
China is becoming stronger and stronger in the world, not only in economy, but in military.

Posted by Leo.Tian | Report as abusive
 

Gold has value because we give it value. Just like everything else in this world. It is priced in USD and has experienced recent gains due to the devaluation of the US dollar. Gold is a safe investment because of it’s history of being a valuable metal and as a commodity used in manufacture. Just like copper has skyrocketed since the early 90′s… the growing industrial world has placed a demand for the best/ affordable conductor of electricity.

As a non-U.S. citizen who has a small 10 ounce investment in gold over the course of a year, with currency exchange taken into consideration, in one year of sitting on a $9700 investment. I could cash out with around $11,000. So has gold gone up or has the currency in which it is valued gone down?

I vote the later. I’m only 37, so I can’t say “I remember when…” but… The English pound Sterling used to be the reserve currency and everything was priced based on the value of the English empire. I think it was in the sixties that it changed over to the United States Dollar and the USD became the reserve currency held by other nations, until now.

The United States Of America is still a massive force of production in the world, but the out-sourcing of jobs to other countries is creating jobless Americans who then need to rely on “the system” which drains government resources, which drives public spending… which leads to more debt.

Which leads to a worthless dollar owing to the global community more than it can ever hope to repay because the government and the greedy people shipped all the good jobs and paychecks to other countries creating slums in their own neighbourhoods just so some rich could get richer.

My advice… energy stocks and hard commodities like gold. Safe investments that won’t make you rich overnight but should keep your money safe and slowly growing.

Posted by J MacMillan | Report as abusive
 

Hey, pretty smart investors!

 

To Mike Altmann,

It will happen in 2010, after the first quarter is closed :)….now you happy?

Posted by Ananke | Report as abusive
 

Gold is skyrocketing because of Obama’s spending and the Feds monetizing debt. Your dollar is worth much less since Obama took office and started spending. Inflation has just started. This country now owes 104 trillion dollars in debt and obligations. At $10,000,000 per day it would take 273 years to make up one trillion dollars. Our economy is gone and gold will stay up.

 

Gold is skyrocketing because of Obama’s spending and the Feds monetizing debt. Your dollar is worth much less since Obama took office and started spending. Inflation has just started. This country now owes 104 trillion dollars in debt and obligations. At $10,000,000 per day it would take 273 years to make up one trillion dollars. Our economy is gone and gold will stay up.
Thanks for the great reading, we Buy Gold in a recession. I will pass this on to our ira clients to read.

 

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