Gold loses sheen, but still a safe bet(2)

Returning to stability

Among all the precious metals, gold remains investors' favorite. They have significantly less zeal regarding other options such as silver, according to Thomas Cheong, vice-president of the wealth management department at Manulife Financial China operations.

Over the last two years Chinese buyers of gold have displayed a remarkably consistent attitude toward the metal: Demand for investment and jewelry throughout 2012 has shown little variation over 2011 quarterly levels.

Gold demand came under pressure from a variety of opposing forces in 2012, with the net result that quarterly year-on-year changes have been less than significant. Tailwinds propelling Chinese demand included the continued urbanization of the population, the dominance of 24-carat (pure) gold and its role as a savings proxy and increasing availability of gold investment products to a population with a growing awareness of gold's investment properties — particularly its role as an inflation hedge, according to a World Gold Council analysis.

According to statistics compiled by the council, in volume terms, Chinese gold demand can best be described as stable, a minor increase in investment demand being slightly overshadowed by a moderation in jewelry demand. Total customer demand was valued at 262.7 billion yuan ($42.2 billion) in 2012, an increase of 3 percent over the previous year, as people in China continued to allocate greater sums to their gold investment and jewelry purchases. Demand in both sectors reached a record value in 2012.

Gold bars and coins remain the most popular gold investment products, said Gu Xiaochao, a sales manager with China Construction Bank.

"China's investors have a long history of using gold as a tool to hedge financial risks. It is understandable that when people see something as a guarantee of financial safety and stability, they like to see and touch it," said Gu.

The sales manager added that after the media exposed the fact some jewelry brands sell products made with iridium but claim they are pure gold, investors have become more cautious about purity when buying the metal. However, there has not been much of an effect on investment demand.

"We still have clients popping up to buy scores of gold necklaces or handfuls of gold rings. Investment in gold jewelry is as popular as ever," said Yan Fang, a sales consultant at a gold store in Shanghai's Yu Garden — one of the city's gold jewelry hubs.

Sun Taoxian, a 45-year-old physician in Shanghai, said she puts about 10 percent of her savings in gold bars. She rents a safety deposit box to store them.

Sun said she is one of many middle-class investors who have tried a large variety of wealth management products since the early 1990s — trading in the stock market, buying and selling foreign exchange, investing in trusts and funds, but she has found gold is the most stable and "safe".

Over the past decade, people have been eyeing high-yield products and hoping to become rich overnight, seeing assets doubling or tripling in a couple of months through speculation on the stock market or gaining a 20 percent yield in trading foreign exchange, but after all these years, investors are getting smart and mature and want slower but safer returns, said Sun.

"If you look at the return on gold investment over a 10-year-term, you'll find that it's actually very good, double that of many fixed-income products," said Sun.

Xue, the analyst with Jinhengfeng, said one reason for the falling price of gold in the global market is the shift of funds from the precious metal to the recovering stock market in the US and reduced concerns about the economic situation as the macro picture improves.

The hedging value of gold may be weakened in the short term but its long-term value for hedging risk is inherent, said Xue.

Continued innovation in the range of gold investment products available across a range of countries including gold accumulation plans in China confirms the healthy appetite for gold among investors, said Yang Yijun, chief analyst with Wellxin.com, a precious metals consultancy.

Gold exchange-traded funds, likely to be introduced this year, could further push up demand for gold reserves in China, said Yang.

Although currently there is no official timetable for gold exchange-traded funds in China, authorities have been making efforts to bring the gold investment market closer to the global gold market.

Yang Fei, an analyst at Seewonder Financial in Shanghai, said investors are also increasingly interested in gold-backed financial derivatives.

"It takes more experience, knowledge and guts to deal in gold-backed funds and, interestingly, more investors are working hard to expand their vision for investment in gold," said Yang.