Gold - New Chinese Products to make it the leading world gold market?
9 April 2010
We were going to post a piece on the dramatically changing COMEX gold market, which will affect the gold price, but decided this piece was more pertinent to the gold price itself. To read about the changes on COMEX you can subscribe at the address above.
Last week we wrote on China and described in general terms the potential growth in the longer term. Below we focus on the on-the-ground potential developments there, which, we believe, will make China the world's largest market for gold. We have long maintained that China's gold market needs to be developed across the country and not just in the main centers. The elimination of the premium on the gold price 'in the sticks' compared to the main centers will evidence that their gold market is maturing. A simple press statement last week from the World Gold Council hides what we expect will bring about countrywide interest in gold right down to the middle-class rural centers.
"The World Gold Council and the I.C.B.C. will explore and jointly develop new gold investment products tailored to the Chinese market, and conduct surveys and studies on the domestic retail gold investment market, facilitating financial innovation and product diversity. In addition, W.G.C. & I.C.B.C. Precious Metals Business Department(s) will set up an I.C.B.C. /W.G.C. Gold Business Strategy Board to discuss and plan strategies for their cooperation, as well as an Action Team to oversee the implementation of the decisions and initiatives adopted by the Strategic Group"
They remain tight-lipped about what these products will be nor do they give out any information on potential products. At the moment the W.G.C. are saying that the partnership came about as a 'meeting of minds' between the W.G.C. and the I.C.B.C. and a "shared vision". The products are under development right now.
However, a glance at just who these two bodies are gives us a clear direction on what to expect. Immediately, it's clear that this is a dynamic announcement and one that will, in time, impact heavily on the gold market internationally!
The World Gold Council
Its mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders. How has it done this in the past? The concept of the gold Exchange Traded Fund came from the W.G.C. in the first place. This led to five such funds holding over 1,320 tonnes of gold bullion in bank vaults across the world. This has to be the first point of departure in this 'alliance'.
From the Middle East eastwards investors like to hold bullion itself and away from the banks and government eyes, but in China savings are held largely in banks making such developments easy to achieve.
As the largest bank in the world the I.C.B.C. is the largest commercial bank in China and also the largest bank by market value and the most profitable commercial bank in the world. China is a nation of savers, saving on average up to 40% of their income in banks. The I.C.B.C. bank is ideally placed to properly develop the Chinese gold market. By the end of 2009, the I.C.BC. had 16,224 offices both in China and abroad, offering a wide range of quality financial products and services to 212 million individual customers and 3.63 million corporate clients around the world.
The potential Chinese Gold Market will now be reached
This week GM's Chinese operators there announced a 300% profit. Such growth in the car market evidences the growth in disposable income. Within a decade we expect 2/3rd of China to be living in cities and earning far more than they are today. Their savings will go into the main banks and attracted to the products available for investment. To date investment choices have been extremely limited with straightforward savings leading the way. Carefully tailored gold products may well be attractive to such people.
New gold products will have to be tailored to the banking/savings environment and for home consumption. The branches of this bank reach into the far corners of China and will bring an existing distribution system to the world of gold, there.
This project has the potential to 'mature' the gold world in China and help to raise the per capita gold holding from the lowest in Asia [at 0.26 grams per capita] to close to the norm in places like Hong Kong. This will involve at least a potential growth of up to 10+ times the present holding. Success will take the Chinese gold market on a rising slope from the current 347 tonnes annual demand to the world's main gold market, overtaking India [peak - 850 tonnes] in the medium term [we think less than 5 years - it took the gold Exchange Traded Funds three years to build to 1,300 tonnes].
In China there are already Yuan, US. $, Yen, AU $, HK $, € deposit accounts so a 'gold' account at the local branch is a small extension for the saver there [thanks Professor!] in your regular local bank savings account. We could see Chinese gold Exchange Traded Funds too, but the average saver in China is not a financial product/stock exchange knowledgeable individual, so simply understood products will lead the way.
Expect products that are bank controlled, lower purchasing costs, held in the bank for the investor. The main client base will likely be an existing I.C.B.C. client. Gold demand will, therefore, grow in line with the growth of these towns and cities and the Chinese Middle classes. Just extending current growth levels into the future tells us such gold account growth will be dynamic and rapid.
No doubt the lead taken by the I.C.B.C. will be followed by the rest of the Chinese banks reaching all such clients in these banks throughout China.
We have no doubt that this partnership has the potential of impacting the world's gold market to a far greater extent than the advent of the original gold Exchange Traded Funds!
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