World Gold Council to court institutions in China and Japan

Gold prices hit record highs recently, and many in the market feel they are likely to rise yet further. Barclays Capital, for instance, forecast last week that the price could rise as high as $1,500 an ounce, a view also taken by Bank of America Merrill Lynch. Certainly, in inflation-adjusted terms, the metal -- which hit $1,061 a troy ounce last week -- is some 46% below its January 1980 peak price.

Continuing recessionary and inflationary fears are clearly one reason for this flight to safe-haven assets such as gold. Another factor -- in the coming months at least -- may be a growing trend among institutions in Asia to view the metal as a separate asset class, says Albert Cheng, managing director for the Far East at the World Gold Council (WGC).

In fact, WGC's main focus in Asia was previously on the retail market, but it is now looking to educate and attract more institutions into buying gold. This follows the success of similar efforts by the organisation in the US, where 40% of gold investment now comes from institutions.

Institutional mandates in Asia have traditionally not allowed for a lot of investment in commodities, adds Singapore-based Cheng, but some firms are considering expanding their mandates to specifically include gold.

As a result, WGC plans to hire more gold advisers to cover China and Japan and "build capacity to be able to talk more to institutions". Such individuals need to have knowledge of both the physical and financial markets for gold and be able to combine them, says Cheng. WGC has no dedicated staff covering China and Japan, although State Street Global Advisors (SSGA) acts as its representative in Hong Kong and Japan.

China will be the main focus of gold marketers, says Cheng. "Gold investment in China is just beginning," he adds. "And it requires a lot of infrastructure building, in terms of the providers of services and products," something WGC is helping with. For example, gold ETFs are not available on the mainland at present, and it's uncertain when they will be, says Sammy Yip, head of exchange-traded funds at SSGA in Hong Kong.

In the meantime, investors globally are putting more money into physical gold. Investment in the physical commodity has been allowed in China since 2002, but has only really picked up in the past 18 months, says Cheng, due to fears over a potential recession and inflation, and a desire to hold hard assets.

Gold jewellery demand has in fact dropped significantly this year in many Asian countries, with one exception being China, which has seen a 6% increase in 2009. Indian physical investment demand was 3 tonnes in the first half of 2009, compared to 81.8 tonnes for full-year 2008, while Chinese first-half demand was 33 tonnes, as against 69 tonnes for last year. The figures were 34 tonnes for 2007 and 18.9 tonnes for the year before.

Western demand for the commodity grew strongly in the first half. US gold demand was 54 tonnes in the first half of 2009, compared to 79 tonnes for full-year 2008; German first-half demand was 77 tonnes, against 66 tonnes last year; and Swiss first-half demand was 62 tonnes, compared to 72 tonnes in 2008.

Inflows into ETFs also indicate increasing physical demand, as these vehicles invest in the hard commodity. The SPDR Gold Trust -- the biggest gold-backed ETF by AUM, of which WGC is the sponsor and SSGA the marketing agent -- had $37 billion in AUM as of last week, up from $22 billion at the start of the year.