How to deal with inflation? Buy gold! Shoppers, retailer and miner say

11:44, April 11, 2011      

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As people in China were overwhelmed by anxiety about soaring prices, many residents in the Chinese capital believe they have found a good alternative to hedge against price increases: gold.

"I want to buy some gold to protect my wealth from inflation," Feng Chun, a shopper in her forties said while trying to pick one gold bracelet amid the crowded counter at Caishikou Department Store, the largest gold dealer in downtown Beijing.

Counters of the gold dealer were swarmed by people who were eager to purchase gold bullions, as well as platinum, jade, diamond and other precious jewelry.

"Gold is small in size and good for collectible purposes. Moreover, it can help expel evil spirits and bring good fortune to my house, according to Chinese culture," Feng said.

Gold hit a new high of 1,471.49 U.S. dollars an ounce last week on global markets and the international optimism towards a bull market for the precious metal has a more realistic reason in China: as a means to protect your wealth from soaring inflation.

Additionally, the Chinese government has announced that price controls remain one of its top priorities this year, as the Consumer Price Index (CPI), a main gauge of inflation, rose 4.9 percent year on year, both in January and February.

Many economists expected the March CPI figure to shoot up above 5 percent, or even as high as 5.6 percent, well above the government full-year inflation control target of 4 percent.

However, the benchmark interest rate for one-year deposits in Chinese banks stood at 3.25 percent after the central bank hiked the interest rate twice this year to counter inflationary pressures.

The "negative interest rate" in real terms, which means the value of those one-year deposits people put in banks, will shrink, prompting the public to look for other ways to store their wealth, said Wang Chunli, general manager of the Caishikou Department Store Co. Ltd, which owns the department store of the same name and is often shortened as Caibai company.

"Under the current inflation level, holding gold is considered by many of our shoppers to be a hedge against inflation," Wang said. "Looking at the crowds inside our store, I believe gold will continue to be a good investment option and I think more people will join the (gold) buying group."

At the Caibai company, sales of gold items surged 60 percent year on year to 7.3 billion yuan (1.1 billion U.S. dollars) in 2010, according to the general manager.

Gold miners, like retailers, were also benefiting from the bull run of the yellow metal.

In an interview via emails with Xinhua, Owen Hegarty, Vice Chairman of Hong Kong-listed G-Resources Group Ltd., expected the gold rally to likely continue in the foreseeable future.

"Right now, all the demand factors for gold are positive and supply factors subdued," Hegarty said, "To me, gold is the perfect metal -- a commodity, a currency, a safe haven, a store of value, a hedge against inflation and a hedge against global political and financial uncertainty."

The upbeat sentiment encouraged G-Resources, a mineral and resources mining and exploration company, is now preparing to bring on its Martabe Project in Indonesian to 250,000 ounces of gold and 2 million to 3 million ounces of silver around year end, he said.

Hegarty added that demand for gold for jewelry and industrial use continues to increase -- especially from China and India, as well as the rest of the developing world, as standards of living and per capita income and savings levels rise.

According to Hegarty's observation, central banks around the world are no longer selling gold, but back into a buying mode, instead. "For the last decade it was the central banks that filled the physical demand/supply gap by selling gold into the gap. That has now stopped."

"You are now seeing pressure on inflation -- not just in China, but all around the world. Gold is one hedge. It is equally a hedge against a declining U.S. dollar. These trends will be with us for a while yet," he added.

Source: Xinhua
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