Investors in China Bid Up Gold Futures

By Alfred Cang and Lucy Hornby

The first mainland Chinese gold futures contract jumped in its debut Wednesday as traders pushed the price to a hefty premium over global peers on a day when spot gold prices hit record highs.

Local traders welcomed the contract as a fresh opportunity for mainland Chinese to diversify their investment portfolios, raising the profile of gold on the mainland where strong returns from property and stock markets have overshadowed alternatives.

That in turn could spur mainland interest in holding gold as an investment, adding to global demand for the metal that helped push spot prices 30 percent higher last year and set a series of records over the past week.

The spot price for gold hit $891 an ounce Wednesday, its second high in two days.

Efforts by the Shanghai Futures Exchange to deter individuals from speculating too heavily on the contract did little to dampen its debut, with active trade of over 73,000 one-kilogram lots in the first-month June contract.

“Gold is bullish in a long-term outlook,” said Wang Zheng, an analyst at Fubao Metals. “Concerns on inflation, U.S. dollar depreciation and rising energy prices are spurring market participants, including Chinese investors, to put their money into gold.”

Inflation in mainland China rose to an annual rate of 6.9 percent in November, an 11-year high, and mainland investors who fear a further erosion in their purchasing power may be rushing to the latest investing fad.

“There are a lot of relatively inexperienced investors looking to hedge,” against inflation, “and the message has always been in times of inflation ‘buy gold,’ ” said Jonathan Barratt of the Australian brokerage firm Commodity Broking Services. “That will attract a lot of individuals to the new Shanghai contract.”

June futures opened at 230.95 yuan, or $31.79, a gram, up nearly 10 percent from the base price of 209.99 yuan set by the Shanghai Futures Exchange. It briefly hit its upper cap of 230.99 yuan before retreating to close at 223.30 yuan.

When the steady appreciation in the yuan that analysts expect is factored in, June futures in Shanghai are at nearly $1,000 an ounce – based on 7 yuan to the dollar – well above $903.70 an ounce for June futures in New York.

Analysts outside the mainland attributed the premium to the traditional allure of gold and unfamiliarity with its risks among mainland investors, who last year propelled the main Shanghai stock index 97 percent higher.

“The price shouldn’t be a hundred bucks higher. It’s not logical,” said Ellison Chu, a senior manager at Standard Bank Asia in Hong Kong.

Traders also said the premium might be caused by the higher borrowing costs that mainland speculators face, the fact that only large banks can import gold to China and because individuals are forbidden from delivering gold against their futures market positions, making it potentially very expensive to close out a short position if prices soar.

“There is a huge advantage to holding a long position in the market, because of the difficulties of going short,” said a trader in Shanghai. “There should be some premium for this reason, I would call it a ‘regulation premium’ or barrier.”

The key gold futures contract for December 2008 delivery on the Tokyo Commodity Exchange rose as high as 3,154 yen, or $28.79, per gram Wednesday, the highest for the benchmark since March 1984.

Traders expected Shanghai futures to converge with international futures as the expiry date neared.

Originally published by Reuters.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.