14 November 2019
We may see crowds in jewelry stores soon as gold becomes more attractive than stocks. Photo: Bloomberg
We may see crowds in jewelry stores soon as gold becomes more attractive than stocks. Photo: Bloomberg

Why Chinese damas are selling stocks for gold

Crude oil futures have slumped to nearly US$40 per barrel amid growing market jitters.

Commodity currencies are also falling, and emerging markets suffer from heavy sell-offs. Fund managers are forced to cash out due to mounting redemption pressure.

The Hang Seng Index has plunged to a bear market, and market sentiment is very bearish. It’s quite natural to opt for shorting rather than holding long positions given the current market situation.

I still believe the Chinese yuan won’t post a further sharp devaluation, although investors are still fearful of currency wars.

Many dim sum bond investors have decided to redeem their investment to avoid foreign exchange risks, as the daily fixing has started to come in line with market levels on the onshore market.

However, the secondary market is not very liquid at the moment, forcing fund managers to cash out despite the bad price.

Forced sell-offs are also taking place in the stock market. The Hang Seng Index now has a P/E ratio of less than 10 times, but the market is still under selling pressure.

The Hang Seng Index lost 1.77 percent while the Hang Seng China Enterprises Index tumbled 2.25 percent on Thursday.

Any investor who bought stocks in the last four months would have suffered losses. They should enter the market slowly even when the valuation is getting more attractive.

For example, they could place one order when the market tumbles 3 percent each time. They should have both patience and capital to endure the long dry spell.

Asian financial markets have close links with the US monetary policy. Foreign capital would flow into Asia seeking for high yield amid the gloomy US economic growth and lower interest rates.

As a result, Asian markets may experience a boom or even swell to a bubble.

By contrast, capital will flee Asia and flow back to the United States when the Federal Reserve starts tightening monetary policy in light of the economic uptick.

Asian markets would suffer from sell-offs in equities, foreign exchange and bonds.

The cycle has been played out many times: in the 1997 Asian financial crisis, the 2008 financial crisis and the recent emerging market crisis.

The heightened market volatility was all due to disruptions in the global financial order.

The depth of the crisis largely depends on the pace of the Fed’s “lift-off”. The latest Fed minutes show that they want to hike interest rates, but are still waiting for further confidence in inflation and China’s economy.

It’s quite likely that the first rate hike will happen in December.

The US dollar has presented a mixed picture so far this month. The US dollar index eased 0.1 percent on Thursday; copper, gold and aluminum prices rose by 1.3 percent, 1 percent and 1.5 percent respectively.

However, crude oil price fell 1.2 percent to US$40.25 per barrel.

Ivan Glasenberg, chief executive of the world’s largest commodity trader Glencore, has blamed its worse-than-expected interim results on slower China demand, as many new projects have been delayed due to China’s anti-corruption fight.

Aggressive short-selling by hedge funds has also pummeled copper prices.

China accounts for 40 percent of the global copper consumption and 50 percent of the aluminum demand.

Falling metal prices have reflected the market view on China’s future fixed-assets investment growth.

Copper and aluminum prices are unlikely to see a steady recovery unless Beijing’s pro-growth measures take effect.

I always look at the direction of the US dollar before making any decision. The US dollar is likely to strengthen further, and the euro has performed very well.

The gold price has bottomed out, and the Chinese central bank is set to reduce dollar-denominated assets as the government adopts a more market-based foreign exchange regime for the renminbi.

The People’s Bank of China has kept increasing its gold reserve for two straight months, in a sign that China will adopt a basket of currencies, including those from Asia, in its foreign exchange reserve.

It’s a good buying opportunity given that Asian markets have witnessed heavy sell-offs across equities, bonds and currencies.

If the Chinese currency is included in the International Monetary Fund’s special drawing rights currency basket, there will be a bigger demand for the renminbi as a foreign reserve currency and reduced demand for the US dollar in the long run.

Gold has outperformed recently in renminbi terms, and Chinese damas have benefited from both price and exchange appreciation.

The yellow metal is far more attractive than stocks. We might see crowds in jewelry stores very soon.

Chow Tai Fook Jewellery Group (01929.HK) rallied 2.2 percent while Luk Fook Holdings (00590.HK) eased 0.2 percent amid a sharp decline in the broad market.

This article appeared in the Hong Kong Economic Journal on Aug. 21.

Translation by Julie Zhu

[Chinese version中文版]

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columnist of the Hong Kong Economic Journal