Gold Prices Will Ride Higher on this New Investment from China

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China remains a small player on the international gold scene, but that's about to change, and that's good news for those betting on higher gold prices.

You see, currently China's gold investors have few opportunities to play rising gold prices, which they want to do increasingly to hedge against risk and inflation. Most buy gold bars and notes to bet on higher gold prices.

But they will soon have more options.

The China Securities Regulatory Commission on Jan. 25 announced the country's rising gold demand required diversified investment instruments. It announced provisional guidelines for gold exchange-traded funds (ETFs), which have been prepared for launch over the past few years and will be made available soon.

The CSRC said that the gold ETFs would be invested in the spot contract traded on the Shanghai Gold Exchange and up to 10% on other products.

In the future, the funds could be opened up to futures contracts.

"Later on, we will further open up the market and quicken the steps to integrate into the international market," Xie Duo of People's Bank of China said. "We should actively create conditions for the gold market to become integrated with the international gold market."

Here's how this news is bullish for gold prices.

How China Gold ETFs will Boost Prices

China offering gold ETFs would enable more individuals in the country to invest in gold, creating more demand for the metal and boosting the price of gold.

Gold ETFs are already popular in the global market. By July 2012, there were 240 gold ETFs with total assets of more than $140 billion, according to the CSRC.

The news of China gold ETFs might appear to be of little consequence to those investing in gold through an ETF such as SPDR Gold Trust ETF (NYSE: GLD) or iShares Gold Trust (NYSE: IAU), or investors living in Europe holding gold ETFs.

But Chinese gold-backed ETFs could bode well for holders of GLD, IAU and similar funds.

IAU owns more than 215 tons of gold, which is only about one-seventh what GLD holds. Globally, gold-backed exchange-traded products hold more than 2,600 tons of gold.

To put that in perspective, Italy is home to the fourth-largest gold reserves in the world, but if all the gold ETFs were combined, they would surpass the amount of Italy's gold reserves.

If China joins the market, then global gold ETFs will need even more gold, increasing demand – which raises prices.

If China ETFs are anything like the U.S. counterparts, they'll enjoy incredible price run ups.

For example, GLD debuted in November 2004. The day before GLD debuted, U.S. gold futures closed just above $445 an ounce.

Now, gold is trading around $1,676 an ounce, and GLD has climbed more than 261% since hitting the market. IAU is up more than 281% since its February 2005 debut.

What we're getting at here is that a case can be made that gold ETFs are, at various points in time, the tail wagging the dog that is the gold market.

Of course, there are no guarantees any Chinese ETFs will be as successful as GLD or IAU. That is the cautious assessment, but if lightning can strike twice for gold ETFs, having China along for the ride will certainly help.

If you're interested in gold price news, check out Money Morning Global Resources Specialist Peter Krauth's take on the significance of Germany's recent gold repatriation.

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  1. Barry | February 6, 2013

    Good article. I specialize in computer salvage, so I try to stay current on the precious metals markets. Sign me up for the Money Morning Newsletter.

  2. Vernell Archila | February 18, 2013

    Excellent article! Great reading this.

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