The stock market is bearish, interest rates are dismal and investment channels are limited.

So which investment vehicle would help maintain the value of your assets?

The answer could be "gold."

It is a necessary ingredient in an investment portfolio because of its long-term value and as a hedge against risk, experts say.

According to a research report by the World Gold Council (WGC) and the Beijing Gold Economy Development and Research Centre released last month, it is prudent to pool 5-10 per cent of individual assets into the precious metal, either in physical or paper form.

"During market fluctuations, gold moves in a direction opposite to all investment tools, including stocks, bonds, securities, funds and foreign exchange," says Albert Cheng, managing director of WGC Far East.

It is among only a handful of financial assets that is not matched by a liability and can provide insurance against extreme movements in the value of traditional asset classes in times of instability, he says.

WGC is a London-based non-profit organization that promotes gold consumption.

In times of uncertainties in the international market and a falling US dollar, gold supply cannot be cranked up in a short period because there are few new mines - which means it could be a golden moment to include the metal in an investment portfolio.

World gold prices reached an 18-year record high of US$455 per ounce late last year mainly because of the weak US dollar. Last week, they were hovering around the US$425 mark.

"The price has not peaked, we believe," Cheng says.

The report indicates that though bank savings are the safest way to keep your assets, the rate of return is rather poor in China, given the low interest rate and the 20 per cent interest tax.

Official statistics show that the combined savings of citizens on the mainland amounted to 12 trillion yuan (US$1.45 trillion) at the end of last year.

Meanwhile, the stock market has been in the grip of bears for years; and the immature bond, securities and fund sectors highlight the value of gold.

Individual investment

China's individual gold investment is likely to surge in the coming years with market liberalization and more new products catering to consumers.

The report points out that the favourable policies decreed by the central government may make ownership of gold as an investment easier.

The China Banking Regulatory Commission, the nation's banking watchdog, gave the go-ahead to the country's four biggest commercial banks - Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China - to operate individual gold investment business at the end of last year.

Bank of China launched its "Gold Treasury" on trial in late 2003 - the first paper gold product on the mainland - and China Construction Bank released "Account Gold" on February 28.

"Compared with physical gold trading, paper gold products are more convenient and economical, as investors need not worry about how to store the gold bars. Also, no gold processing fee is charged," says Cheng.

Agricultural Bank of China has tied up with Shandong Zhaojin, one of China's largest gold mine operators and processors, to provide a physical gold trading platform for individual investors from January 14.

Another investment form available to retail investors is commemorative gold bars or coins sold in department stores or specific gold shops.

Liu Shan'en, a researcher with the Beijing Gold Economy Development and Research Centre, cites the Lunar New Year gold bars issued every year since 2002 as an example.

"In 2003 and 2004, 1.25 tons of bars were sold each year; and to meet the supply-demand gap, 1.985 tons of bars were issued this year on the retail market," says Liu.

However, Liu points out that commemorative gold bars are not a pure investment vehicle "as designing and processing fees are charged and its value mainly lies in collection."

Individual gold investment on the mainland is limited to spot transactions. Though the People's Bank of China, the nation's central bank, has proposed the establishment of a gold futures market, a timetable has not been announced because conditions are not ripe, it said earlier this year.

"As the renminbi is not fully convertible, gold investment in China cannot fully catch up with the international market. Investment products such as gold options and swaps cannot be launched now," says WGC's Cheng.

"When China's gold market is completely open, such derivative products may play an active role in the market."

Cheng indicates that the full liberalization of the currency system and the gold market will bring foreigners in, bringing with them sophisticated products and experienced marketing skills, which will benefit consumers.

China launched gold trading on October 30, 2002, with the establishment of the Shanghai Gold Exchange. But the nation's only gold exchange is closed to the individual investors and only registered members - 16 commercial banks, 101 gold exploration and processing enterprises and 11 retailers - are allowed to carry out transactions.

Consumption surge

Statistics from the WGC reveal that mainland gold consumption, including retail and institutional investment and sales of gold jewellery, increased 13 per cent and 21 per cent in volume and price respectively during the fourth quarter of last year compared to the same period in 2003.

Growth was 1.7 per cent and 3.2 per cent in 2003 respectively.

Mainland consumer demand for gold reached 234 tons in 2004, up from 207.4 tons in the previous year.

Demand for gold as retail investment surged 53.1 per cent to 9.8 tons last year from 2003, much higher than the increase of institutional investment and jewellery consumption.

China is the world's third-biggest gold consumer after India and the United States.

"Consumption on the mainland is expected to maintain the growth momentum this year as a result of China's steady economic growth and bullish gold prices," says Cheng.

The WGC forecasts that growth in China's total consumption to be around 30-35 per cent in the next five years, with growth in retail investment expected to outstrip institutional investment and jewellery consumption.

(China Daily 07/18/2005 page4)