China Investment Corp Buying Into Gold ETFs

It would seem China can’t get enough of gold. The authorities were overtly encouraging the population to buy gold from the middle of last year, many said as an attempt to sop up excess consumer liquidity although we suspect if they really wanted to do that they would be pushing the banks to offer high savings rates and withdrawing the stimulus measures designed to encourage spending. China has been a significant market for jewelry use and with a rising sense of affluence that has continued to grow.

Coming on top of the above, the central bank recently revealed it had been buying gold as a long term policy. It has already amassed over 1000 tons, largely by buying refined domestic gold rather than large quantities of open market gold that would have moved the market. Some analysts see China behind the apparent support level for gold of around $1000/ounce although various technical support points also exist at $1019 and $1020 that could equally be to blame.

The one area that China has not been overtly involved in is the rapidly growing ETF market appearing to prefer physical holdings to paper holdings well that is now about to change. China’s sovereign wealth fund China Investment Corporation has taken a $155m stake in SPDR Gold Trust, appropriately the largest gold ETF. The 1,45m shares represents only 0.4% of SPDR’s assets and is a small investment in terms of CIC’s approximate £300bn net worth but it is interesting that the Chinese have taken this step at all. Some have suggested China is seeking to diversify from dollar holdings the excuse given to every purchase of commodities or assets other than treasury bills. If so $155m is a drop in the ocean so we suspect if there is any foundation to this theory then it is part of a longer term experiment to develop familiarity with the ETF market. As a hedge against dollar weakness, gold is a tried and trusted market but for a country holding China’s level of reserves of $2.4bn at the end of December 2009. China can’t buy enough of anything to hedge against that size of risk. Even buying 10% of reserve levels would move prices of any commodity so dramatically that China would gain a hedge but pay twice for the privilege. No the reality is that as a world power with massive reserves, China must explore all investment options. Cash and treasuries leave the country horribly exposed to the fortunes of US economic policy.

–Stuart Burns


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