Is gold Asia’s fatal attraction?

The listing of Chow Tai Fook, the world’s biggest jeweller, on the Hong Kong Exchange last month went off with a whimper rather than the thud that many were expecting. Blame the recent correction in gold prices. The company, which runs about 1,500 jewellery shops in China, Hong Kong, Macau and Taiwan, had rea­died its IPO that raised US$2 billion when gold prices were surging, but was forced to delay the listing because of market volatility. Though the listing was priced at the absolute bottom of the earlier indicated range, the jewel­lery chain’s stock has since slid more than 4% below its IPO price.

Even so, Chow Tai Fook is no pushover. With a market value of US$18.7 billion (RM58.91 billion), it is worth more than twice as much as New York-listed Tiffany & Co, which has a market capitalisation of just under US$8.4 billion. And while it may not have the bling of Tiffany, Chow Tai Fook’s margins are far bigger. The jeweller is majority-owned by an 86-year-old Hong Kong billionaire who also owns the territory’s fourth largest property firm, New World Development, and has extensive infrastructure investments in China.

I remember interviewing Cheng and his son Henry, who has effectively run the empire for two decades, in the mid-1990s. The elder Cheng’s story was a classic rags to riches one. When he was 20, he fled China in a boat to Macau, where he started as a clerk in a small jewellery store. He ended up owning the store after he married the owner’s only daughter. Sixty years on, Cheng, who is said to be worth more than US$15 billion, now runs the world’s largest jewellery chain. It’s all because of China’s obsession with the glittery stuff.

Though Cheng began entrepreneurial life as the owner of a jewellery store, he soon diversified into property. That’s the real gold in Hong Kong. When I interviewed him and his son 16 years ago, the jewellery shops were just a tiny part of the family empire. I recall that the Chengs didn’t really want to talk about their private little gold-shop chain. You’d see the Chow Tai Fook shops in Hong Kong, but it was New World’s office blocks, hotels, malls and, of course, housing developments that brought the Chengs fame and fortune.

It wasn’t until a large middle class started emerging in China a decade ago that Chow Tai Fook really took off. Until then, the jewel­lery chain had a couple of dozen shops in Hong Kong (it now has more than 50 in the territory). The Chengs began opening new stores across China and expanded in Taiwan and Macau. The stores that once had a dowdy China­town jewellery shop look were spruced up. They might not have the cachet of Van Cleef & Arpels stores, but given the fact that their clientele is middle-class mainland Chinese, they are as upscale as a mass market Chinese jeweller can get.

As recently as 11 years ago, gold prices were languishing at just over US$200 an ounce. Last August, gold broke through the US$1,900 cei­ling and was hovering around US$1,650 an ounce this past week. While the yellow metal has long been seen as a hedge against inflation, and the deteriorating European sovereign debt crisis was a key catalyst for the precious metal’s surge last year, it is investment and jewellery demand from China and India that are really dri­ving gold.

The World Gold Council website says two-thirds of gold is now ending up in China and India. Though monthly and quarterly numbers vary, about 40% of gold is ending up in India and about 26% in China. In India, it is almost all jewel­lery and, in China, gold demand is part jewellery, part investment. Early last year, China installed the first of its ATM machines that dispense nothing but gold coins. In 2000, total investment demand for gold in China was just two tonnes. Last year, it was about 250 tonnes. Almost all major Chinese banks now sell gold coins and offer gold accounts for their clients.

India’s obsession with gold is even worse. Gold consumption in India in volume terms was up 5% annually during the first three quarters of last year, despite a 64% increase in gold prices in rupees on top of the 72% annual growth registered in 2010. But despite the obsession, gold demand is price-elastic, even in India. Gold imports into India plunged 56% year-on-year to 125 tonnes in 4Q11. Someone recently forwarded me a Macquarie Securities report titled “India’s fatal attraction”, which chronicled India’s love for gold.

As the world’s largest consumer, India now imports about 1,000 tonnes of gold every year. The boom in gold imports, the report says, was “resulting in a widening current account deficit and a depreciating rupee”. Yet, at the same, sharp rises in gold prices are responsible for the rising wealth of Indian households. The World Gold Council estimates that Indians hold the largest stock of gold in the world, with 18,000 tonnes, or 11% of the world’s total gold, held by households. At current market prices, that would be worth US$1 trillion, or more than 50% of India’s nominal GDP in US dollar terms. Macquarie estimates that 7% to 8% of India’s US$329 billion in household savings was held in gold as at last March.

Analyst Tanvee Gupta Jain, who wrote the Macquarie report, noted that since much of the physical savings of Indians is locked up in unproductive physical assets such as homes and gold, the flow of productive savings required to boost investments in the economy has been reduced. In the last fiscal year ended March 2011, India’s net import of gold soared to US$23 billion. That’s making the country more vulnerable to rising trade and current-account deficits. While China can afford to keep importing more gold and keep hoarding it, India can’t. Clearly, as a nation, Indians need to come to grips with what has become a serious problem.

In his 2001 book, The Power of Gold: The History of an Obsession, historian Peter Bernstein weaves a tale of the most coveted asset of all times. From the ancient fascination of Midas to the bling of Chow Tai Fook’s stores, gold has come a long way. But instead of buying all the gold in sight, Asians need to temper their obsession with the yellow metal with some pragmatism.

Assif Shameen is consulting editor with The Edge Singapore

This article appeared in The Edge Financial Daily, January 11, 2012.

Posted by admin on Jan 11 2012. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry