China’s young gold-backed ETFs shrug off short-term shocks, evolve into long-term bets

China Daily (USA) - - BUSINESS - By WU YIYAO in Shang­hai wuyiyao@chi­

When 63-year-old re­tiree Zhu Wan­hua heard about the open­ing of the Shang­hai Book Fair in Au­gust, she went to the an­nual event de­spite the late sum­mer heat, in search of books on how to trade in gold­backed ex­change-traded funds.

“There is a say­ing that when mar­kets fluc­tu­ate, you should buy gold. I know there is a lot of talk about dama (re­tired ladies) buy­ing gold. I used to buy gold too, but stor­age and trans­ac­tions posed trou­ble. So, when I met my friend who trades in gold­backed ETFs, I de­cided to learn about them,” she said.

Sec­tions of in­vestors in China have been shift­ing their at­ten­tion to gold-backed ETFs from phys­i­cal gold of late. Like them, Zhu has been track­ing the gold price on­line and sub­scribed to mar­ket news­let­ters. The rise in prices of gold as well as gold-backed ETFs in the first half of 2016 set her think­ing.

The im­pact of the June 23 de­ci­sion of the United King­dom to exit the Euro­pean Union on se­cu­ri­ties, cur­ren­cies and com­modi­ties mar­kets, in­clud­ing the gold mar­ket, is likely to be re­flected in the July-Septem­ber quar­ter.

In the seven days af­ter the vote, searches for “gold” on Baidu surged 44 per­cent yearon-year.

A World Gold Coun­cil re­port said the gold price in US dol­lar terms rose 25 per­cent year-on-year in the Jan­uary-June pe­riod, the best firsthalf record since 1980.

“Gold de­mand in Q2 fol­lowed the trend from the prior quar­ter: huge ETF in­flows coun­ter­bal­anced by anaemic jew­elry de­mand amid ris­ing prices. In­vest­ment was the largest com­po­nent of gold de­mand for two con­sec­u­tive quar­ters, the first time this has ever hap­pened,” the WGC re­port said.

Chi­nese in­vestors’ ap­petite for gold ETFs has been re­flected in the sharp rise in the first half. Com­bined hold­ing of four Chi­nese gold-backed ETFs rose from 6.3 met­ric tons at the be­gin­ning of the year to 24.4 tons at June-end, up 287 per­cent.

E Fund Global Trad­able Open-ended Se­cu­ri­ties and In­vest­ment Fund, one of China’s four gold-backed ETFs, saw a surg­ing ap­petite for in­vest­ments as its as­sets un­der man­age­ment grew from 960 mil­lion yuan ($143 mil­lion) to 1.9 bil­lion yuan in the past two months.

Lin Weibin, man­ager of the fund, said gold re­mains a haven for risk-averse in­vestors and will con­tinue to at­tract more of them amid slow­ing global eco­nomic growth and mon­e­tary eas­ing.

China’s hold­ings of gold­backed ETFs have dipped on oc­ca­sion af­ter the re­lease of some pos­i­tive US eco­nomic data. These dips are con­sid­ered part of a nat­u­ral cy­cle based on in­vestors’ short­term sen­ti­ment change.

Over­all, China’s gold­backed ETF mar­ket is ex­pand­ing fast as in­vestors are get­ting more fa­mil­iar with the in­vest­ment op­tion, said Yang Fei, an­a­lyst with Shang­hai-based See won­der Fi­nan­cial In­for­ma­tion Ltd.

“Gold is al­ways an op­tion while build­ing an in­vest­ment

port­fo­lio. Short-term price fluc­tu­a­tions and hold­ings won’t change gold’s in­trin­sic merit as a long-term hedge against risk,” said Yang.

Cur­rently, gold ETFs in China are quite small rel­a­tive to other in­vest­ment op­tions, so in­vestors have lit­tle say in their pric­ing, de­spite China be­ing one of the world’s largest gold pro­duc­ers and con­sumers. But in­vestors’ in­creas­ing ap­petite and ex­pand­ing knowl­edge will grad­u­ally im­prove the sit­u­a­tion, said an­a­lysts.

Based on the size of gold hold­ings and the size of as­sets un­der man­age­ment by the end of June, China’s four gold ETFs were ranked be­low 50 among the more than 70 ETFs world­wide tracked by the WGC. The world’s ma­jor gold ETFs are based in the US, Canada, the UK, Switzer­land and Ger­many. Their gold hold­ings and as­sets un­der man­age­ment far sur­pass those of Chi­nese ETFs.

Xue Ke, chief an­a­lyst and deputy gen­eral man­ager with Tian­jin Jin­hengfeng Pre­cious Met­als Man­age­ment Co, said that pre­cious metal-backed ETFs in China are go­ing to fur­ther grow and get di­ver­si­fied given ris­ing in­vestor de­mand.

“China’s ex­ist­ing gold­backed ETFs were in­tro­duced in 2012, which means the mar­ket is still quite young. Un­doubt­edly, more op­tions will be in­tro­duced in the near fu­ture,” said Xue.


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