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Why Are Chinese Investors Buying Up Gold Bars?

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Chinese investors are buying gold bars at a torrid rate. China’s appetite  helped drive global demand for physical gold up 9% in the first quarter of 2017. Chinese investors gobbled up 105.9 tons of gold in Q1. That represents a 30% year-on-year increase, and was the fourth strongest quarter on record.

So, why the strong demand for physical gold in China? Mao Mao, a gold dealer in downtown Shanghai, told the Australian Financial Review she sees three major factors  pushing the Chinese gold rush – and they all relate to fear.

People are afraid of war, a falling yuan and slumping property prices,” she said. “Buying gold bars as an investment is a good way to guard against risk.”

Perpetually low interest rates have also pushed investors into gold. Mao said many people don’t want to put their money in the bank, so they buy gold bars instead. The current Chinese base rates stands at 4.350%. While low by Chinese standards, it is significantly higher than interest rates in the US and Europe.

The recent World Gold Council report dovetailed with Mao’s assessment, citing several of the same factors driving China’s hunger for physical gold.

Concerns over the weakness of the yuan and the outlook for the real estate market from the tail-end of last year spilled over into 2017; this combined with the usual seasonal strength around Chinese New Year and a rising gold price to support investor sentiment.”

Government policy has been at least partly responsible for the nosedive in property prices. Several city government across China have introduced property purchase restrictions to bring prices down. Nanhua Futures analyst Xue Na said that with concerns about future weakness in the real estate market many investors have turned to gold instead.

But Zhang Yongtao, vice chairman of the China Gold Association, said the primary driver behind Chinese demand is good old fashioned safe-haven buying due to global uncertainty. He said the election of Donald Trump and his protectionist trade policies, Brexit, and ongoing concerns about war in both North Korea and the Middle East have combined to create a climate of uncertainty and unease.

This trend started in the second half of last year because we saw so much uncertainty in the world,” he said. “There is concern this would have a direct impact on China’s currency.”

The World Gold Council predicts demand will continue to grow in China, helped along by technological advances allowing more and more investors to easily buy gold.

Industrial and Commercial Bank of China (ICBC) teamed up with Tencent to launch a new physical gold-backed product – Microgold – targeted at China’s internet users. Through WeChat – with over 800 million users China’s largest social networking app – Microgold users can invest in gold (based on ICBC’s gold accumulation plans), digitally send gold to friends and family in culturally significant red envelopes, and view real-time prices. This innovation will make gold easier to access for China’s digitally savvy millennials.”

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