Gold wault opens in China as bullion goes from West to East

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Gold bars of five taels (187 grams) and one tael (37.4 grams) are arranged for a photograph in a Chow Sang Sang Holdings International Ltd. jewelry store in Hong Kong.

A gold vault that can store 2,000 metric tons, double China's projected consumption this year, opened in Shanghai this month as owner Malca-Amit Global Ltd. seeks to benefit from rising demand in Asia's largest economy.

The facility is the biggest for the Hong Kong-based company, and it can also store diamonds, jewelry and art, Joshua Rotbart, precious metals general manager, said in an interview. The site could hold bullion worth about $82.7 billion at today's price, Bloomberg calculations show. China's total demand may reach 1,000 tons in 2013, the World Gold Council forecasts.

Consumption in China may increase 29 percent to a record this year, overtaking India as biggest user as lower prices and higher incomes spur demand, according to the WGC. The investment in Shanghai's new free-trade zone reflects a shift in world demand away from the U.S. and Europe toward Asia. Demand for gold jewelry, bars and coins in Greater China, India, Indonesia and Vietnam is now about 60 percent of the global total, up from 35 percent in 2004, according to HSBC Holdings Plc.

"Such a facility is a massive vote of confidence for the Chinese gold market," said Philip Klapwijk, managing director of Hong Kong-based Precious Metals Insights Ltd. "The trend for demand has been very strongly positive," said Klapwijk, who's monitored precious metals since 1988.

Annual loss

Bullion is headed for the first annual drop in 13 years as expectations that the U.S. Federal Reserve will curb stimulus hurt investment demand, spurring record outflows from exchange-traded products. Bullion in London traded at $1,286.88 an ounce at 12:23 p.m. in Shanghai, 23 percent lower this year and 33 percent below the record $1,921.15 reached in September 2011.

"There's going to be more gold coming to China," Rotbart said on Nov. 5. "This place can be used as a trade hub basically, so foreign banks can trade with domestic banks within this facility, saving costs and time."

The Shanghai vault is targeted at international and Chinese financial institutions, as well as the arts community, Rotbart said at the Waigaoqiao free-trade area, where firms have fewer restrictions on investment and foreign-exchange requirements. Apart from Hong Kong and Singapore, where capacity is 1,000 tons each, Malca-Amit also has storage space in New York, Zurich, Geneva, London and Bangkok.

"We expect big demand from foreign banks and we are talking to a few," said Rotbart. "It's a step forward for them because it puts less limit on how they operate in China."

Preserving wealth

While gold in China and elsewhere in Asia is traditionally seen as a way of preserving wealth, Goldman Sachs Group Inc. and Credit Suisse Group AG are among those forecasting more losses. Bullion will average $1,175 in the third quarter of next year, according to the median of estimates from the 10 most-accurate precious metals analysts tracked by Bloomberg in a survey published last month. Prices were last at that level in 2010.

Investors sold more than 755 tons from gold-backed ETPs this year as holdings contracted every month, according to data compiled by Bloomberg. There is a risk that bullion may drop below $1,000 an ounce as the Fed withdraws stimulus and economic data improve, Goldman Sachs forecast Sept. 13.

"There's been a lot of gold being sold out of ETFs, all of that is outside of China," Victor Thianpiriya, a Singapore-based analyst at Australia & New Zealand Banking Group Ltd., said by phone today. "A lot of that has found its way to China via Hong Kong, attracted by demand for bullion bars."

Chinese consumption

China's consumption totaled 776.1 tons in 2012, compared with 864.2 tons in India, according to the WGC. Usage in China rose 54 percent to 706.36 tons in the first six months, according to the China Gold Association, which is funded by miners, refiners, retailers and jewelry makers.

Australia & New Zealand Banking Group, Deutsche Bank AG and UBS AG also opened vaults in Asia this year, and U.K. bullion exports surged, a sign to Macquarie Group Ltd. of the flow of metal from west to east. Bullion demand across Asia will keep expanding as inflation spurs purchases, HSBC economists including Frederic Neumann said in a report on Oct. 18.

China ranks fourth worldwide in terms of the number of people with $1 million or more in investible assets, according to a report by Cap Gemini SA and Royal Bank of Canada. The number of high-net-worth individuals in the country rose 14 percent to 643,000 in 2012 from the year before, the report said. China's gross domestic product increased to $8.4 trillion last year, from $1.5 trillion in 2002, Bloomberg data show.

Net imports

Bullion has been flowing into mainland China even as local output increased. Net imports fromHong Kong more than doubled to 826 tons in the first nine months of the year, according to Bloomberg calculations based on government figures. Local output rose 8.2 percent to 270.2 tons from January to August.

Shanghai is home to the country's biggest physical gold exchange, founded by the People's Bank of China. Gold volume on the Shanghai Gold Exchange rose to a five-month high of 22,703 kilograms on Oct. 8.

China started the pilot free-trade zone in Shanghai at the end of September, promising a more business-friendly regulatory framework and relaxed capital-flow rules. The country may allow more companies to import and export gold under draft rules released by the central bank on Sept. 30.

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