Will paper gold click with heavy metal fans?
China's biggest bank launches paper gold in yuan. But the mainland shoppers it targets may choose to stick with the physical version
ICBC, with its eye apparently on the mobs of mainland shoppers buying all the gold chains they can from Hong Kong jewellery shops, has launched yuan "paper gold".
What is paper gold? It is a piece of paper by which ICBC promises to pay you returns that track the price of gold. If you own the investment for a year and gold rises 20 per cent in that time, the bank is obliged to pay you that full return.
ICBC previously offered a Hong Kong dollar version of this investment. Its latest twist is to price it in yuan. This was partly to make it attractive to mainland investors, who have watched the price of gold fall 9 per cent since the beginning of last month, and are snapping up the metal on the perception that it is cheap.
"The mainland customer is a main focus," says Patrick Yang, a wealth management product head at ICBC (Asia), of the bank's paper gold launch.
No doubt, gold is the asset of the moment. Jewellery stores are running out of stock. The Chinese Gold & Silver Exchange Society says demand for physical gold in Hong Kong is five times normal levels.
ICBC was working on its yuan paper gold instrument for years, says Yang, and it was a stroke of very good luck that it was able to launch the product amid a flurry of excitement for the metal.
But prospective mainland gold buyers will ask themselves whether paper gold makes sense.
Investors will surely first consider the many negatives of buying physical gold, such as cost.
Physical gold is expensive. In jewellery form, shoppers are paying up to 10 per cent premium to the value of the gold contained. Gold bars involve less premium (about 0.13 per cent, says Martin Hennecke, a director at Tyche Group) but paper gold has the tightest premium of all.
Yang says there is only a 40 yuan (HK$50) spread between what people pay for ICBC's paper gold per ounce, and the price for which they can sell it.
Gold is also inconvenient. Assuming a person gets the item safely back home, he still has to store the gold securely, which adds costs. You cannot just leave bricks of it lying about the flat.
Paper gold solves these problems. No need to smuggle anything across the border, and no worries about secure storage.
There is just one problem. People like physical gold largely because it is an invisible asset. There is no paper trail linking a person's name to an investment. That is handy if, for example, a person wants to avoid taxes, or has riches that are hard to account for by official means.
That is a different scenario than, for example, buying paper gold at ICBC, where an investor's holdings would be officially on the books of a giant state-controlled bank.
Holding paper gold in an ICBC account in Hong Kong means mainland investors still have to figure out a way of repatriating their money. Some mainlanders buy physical gold precisely because it is a way of transferring wealth back home, albeit illicitly. Paper gold cannot be so easily transferred.
"If you buy paper gold, you have to open an account with a financial institution, and there are a lot of complications. You have to submit a lot of documents," says Peter Chu, an analyst with Yuanta Securities.
However, if a mainland shopper goes into a jewellery shop to buy reams of gold chains, "no one will ask you to produce your ID card".
People also buy gold because they want insurance against disaster. The thinking goes that if economies collapse and the world descends into chaos, people in the last instance will always be able to use gold to barter for essential goods. Paper certificates would not do much good in such a scenario.
ICBC takes pains to note that the paper gold instrument is not backed by actual gold. People cannot exchange the certificate for a specified quantity of bullion - it does not exist. This may discourage investors who want the security of owning physical gold.
Ronald Leung, a deputy managing director at Lee Cheong Gold Dealers, said: "Old people like to buy physical gold. People wonder if the big banks are really safe. After all, Lehman Brothers went away."
At that is the quandary of paper gold. Officially, it is a great idea. It is efficient and highly tradable. Unofficially, many mainlanders will want to stick to the shiny yellow stuff.