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The golden triangle: gold-yuan offers a triple play

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The golden triangle: gold-yuan offers a triple play

by David Campbell on Nov 04, 2011 at 00:01
Hong Kong’s century-old Chinese Gold and Silver Exchange launched the world’s first renminbi-denominated gold contracts last month in a blaze of publicity.

Most of the hype followed a well-worn template, heralding the arrival of the renminbi as an internationalised currency, predicting the imminent arrival of petro-yuans and, at the more alarmist end, warning that Chinese investors were intent on buying up the entire world.

Less of the attention focused on what use they might be to a British investor. But there are very clear uses for the contracts in a portfolio, almost the least of which is capturing gold returns.

This product offers investors a new-found opportunity to participate in leveraged trading of renminbi,’ said CGSE president Haywood Cheung.

‘I believe that Renminbi Kilobar Gold, which is the world’s first offshore renminbi-denominated gold contract, can truly help to promote the internationalisation of the renminbi, and attract overseas and local gold dealers to engage in arbitrage activities to capitalise on price spreads.’

At launch, the contracts traded at a slight gram-for-gram premium to dollar-denominated gold – owing to slightly stricter purity rules – so for straight gold exposure it is unlikely to be first choice.

The most obvious use is as the first truly liquid, daily dealing, open international market in renminbi.

Up until the past few weeks, when a slowing internal economy prompted the Chinese government to weaken it a little against the dollar, renminbi inflation and trade-weighted appreciation versus the dollar has been rattling on at a much faster pace than predicted, when it announced it would ease the dollar peg.

Over the year to July, the currency had weakened 5% versus the dollar versus initial estimates of 2% to 3%. Chinese policy-making is inevitably opaque, but appreciation versus soaring dollar commodity costs, inflation and the need to internalise the economy makes a lot of sense.

Alongside the currency play, the gold component can either be matched against a short position to neutralise it, or left long to provide a hedge against rising gold. If combined, the two offer a discreet, powerful inflation hedge. A Bloomberg survey of economists recently forecast between 5% and 6% further appreciation in renminbi against the dollar to the end of 2012.

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