Investors load up on Chinese gold stocks, as bullion futures touch new highs on worst-ever US economic data

Stocks rally as gold futures rise to their highest level since September 2012 in New York and a record high in Shanghai
Record slump in US retail sales and factory production and inflation-inducing policies are brightening precious metal’s outlook

China stock market

Zhang Shidongin Shanghai

Published: 2:45pm, 18 May 2020

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Chifeng Jilong Gold Mining, Zijin Mining and other Chinese gold producers surged in Hong Kong and mainland China on Monday after investors chased bullion futures in New York to their highest level in more than seven years, as grim US economic data for April stoked haven demand.

Chifeng Gold surged by the 10 per cent daily limit to 10.27 yuan in Shanghai, its highest close since July 2016. An index tracking mainland China-listed gold producers jumped 4.7 per cent, outpacing a 0.2 per cent gain in the benchmark Shanghai Composite Index, while bullion futures approached a record high set in August 2011.

Zijin Mining Group, which derives about 70 per cent of its revenues from gold production and processing, advanced 4.9 per cent to HK$3.40 in Hong Kong for the stock’s biggest gain in almost five weeks. Zhaojin Mining Industry rallied 7.5 per cent to HK$10.10, while the Hang Seng Index gained 0.6 per cent.

The yellow metal has flourished on the tailwind of weak US economic data as the coronavirus pandemic ravaged the global economy from China to the US and Europe, drawing comparisons to the slump during the Great Depression in the 1930s.

Data published by the US on Friday only entrenched those views, as April retail sales plunged by a record 16.4 per cent, while factory production tumbled by the most going back to 1948. The Federal Reserve, which unveiled an unprecedented bond-buying support, has warned the recovery process may run through the end of 2021 and asset prices including stocks may take a significant pounding.

The reports and downbeat comments helped drive gold futures in New York to their highest level since September 2012, and recently traded 0.7 per cent higher at US$1,769.20 an ounce. Bullion futures rallied 2.7 per cent to a record 401.16 yuan per gram in Shanghai.

“Gold will probably rise above US$1,800 an ounce,” said Wang Hongwei, an analyst at Shenwan Hongyuan Group, who does not rule out the possibility of further Fed policy easing. “Chances are low that the global economy will have a V-shape rebound and central banks around the world are expected to maintain loose policies.”

The metal’s 16 per cent rally this year has outshone the world’s major stocks benchmarks in 2020, stoked by inflation-inducing quantitative easing and rising trade tensions. The S&P 500 index has fallen 11 per cent while the Shanghai Composite slipped 5.7 per cent. The Nikkei 225 lost 15 per cent over the same period.

“We are perhaps seeing the beginning of the long-awaited inflation hedge occurring, as opposed to the safe-haven trade,” said Jeffrey Halley, an analyst at Oanda. “The amount of monetary policy easing, conventional and unconventional, cannot be ignored.”

Other gold producers also rose. Zhongjin Gold added 8.9 per cent to 9.18 yuan in Shanghai and Shandong Gold Mining advanced 8.1 per cent to 39.90 yuan. Hunan Gold gained 5.6 per cent to 8.29 yuan.

The outlook for gold equities is stronger today than at any point in the last 20 years, strategist Sean Markowicz and money manager James Luke at Schroders said in a report published on Monday, calling 2020 a historic turning point for the sector.

“Gold producers are generating margins roughly 200 per cent higher than at the peak of the last bull market in 2011,” they added. “Gold producer equities are reflecting gold prices that are significantly below current spot prices. The macro environment that is driving current gold price strength is particularly favourable to gold producer profitability.”

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