The China Gold Derivative Market Part I: Gold Options Coming

This will be the first of a two or three part series of posts on the Chinese gold derivative market. I wanted to start with gold futures but I'm still checking that translation so enjoy this about this weeks announcement of gold options on the Shanghai Gold Exchange in the likely near future

Shanghai Gold Exchange Gold Options Plans

Shanghai Gold Exchange Will Soon Roll Out New Products

Jinrong Jie (Finance World)

May 13, 2008

Zhou Jingzhen

Translated by China Gold News Blog

http://chinagoldnews.blogspot.com

The Shanghai Gold Exchange is rolling out new products aimed at investors not familiar with gold investment products—experts see gold options as easier to avoid losing money.

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In the past few days, Shanghai Gold Exchange Chairman and Party Committee Member Shen Xiangrong stated that the Gold exchange is thinking of introducing physical gold options. After this information was released it immediately peaked the interest of many investors. Even so, what are the features of gold options as compared to the current types of gold products? Also, how will investors buy gold futures? Some knowledgeable experts present their views on this.

Views on Gold Options

Shen Xiangrong on May 10 at the “Lujiazui Forum” revealed this information. According to him, currently many types of investment products have very high risk. When they rise they shoot up and when they fall they collapse. There is not a hedging instrument. If someone has both futures and options, it is much better. Right now the gold futures have already been introduced but if physical gold options will be introduced, they will also be very useful. Options have low fees and if they rise, profits can be very high but if they fall the investor only looses their upfront payment. The fluctuations in the gold prices have been very large. In March, the spot price’s highest point reached over 230 RMB per gram while now it has fallen to about 180 RMB per gram. If you have options, then you could reduce such risks. The option price is small and investors have limited losses and the risks are fixed from the beginning.

Jiangsu Central Bank Already Has Similar Products

Many investors do not understand gold options. Experts at the Jiangsu Central Bank say, gold option trading is the purchaser buying the right from the options seller to buy or sell physical gold or futures. These are divided into call options or put options. For investors who engage in option trading, you only need a small investment but can have large returns with limited downside risk giving the products a guarantee aspect. The buyer only has to pay an option price and can then has the right to buy or sell the products or futures. Generally investors predict market changes that can be exploited for considerable profit. If their prediction is wrong, they can just abandon exercising the option and only lose the option fee. Suppose that right now the international gold price was $600/oz. and a customer buys a call option contract to buy gold at this price in ten days. If ten days later gold is at $650/oz., the customer can still buy gold at $600/oz. from the bank. If the price falls, the customer can just choose not to exercise the option but looses the call option fee.

In fact, as early as March 1, Jiangsu Central Bank introduced personal gold options trading and it was in order to be involved in international market positions and alleviate RMB and US dollar exchange problems. The service was restricted to US dollar products. It is understood that on March 7, two traders new to options bought two 3-month call options for 1,100 and 770 ounces expecting appreciation. The two investors saw gold’s rise “based on the contract, if at the expiration date, the US dollar price exceeds the strike price, the bank keeps the option fee as its profit” an official from the bank’s capital division stated. For example if one of the investors with the bank signed a $675 per ounce option contract, for 1,100 ounces, the bank would charge an option fee of $33,000. On June 1, if the gold price hits $705 per ounce then the customer could break even. If gold hit $730 an ounce then the customer would get a profit of $25 * 1,100 ounces of $27,500. But what if in that period gold doesn’t rise or falls? He says, that if the gold price actually falls then certain positions will be under given the price did not rise to the contract strike price. In this case, the bank will recommend that the investor sell the contract before the expiration date and not go so far as to lose the entire option fee.

Experts Analyze Investors

The Xihanzhi International Gold Company’s expert on “paper gold” (Ed. “paper gold” -- gold security investments often sold by Chinese retail banks to customers that are tied to gold but that do not guarantee physical delivery) said that the profit returns from paper gold and gold options are about the same. Suppose that in the first case an investor buys paper gold and in the second case the investor buys a gold call option. In different situations the profit/loss result will not be the same for each. If you first buy 100g of paper gold for 150 RMB per gram you must pay 15,000 RMB. If you at the same time buy 100 1-month call option contracts at a strike price of 155 RMB (1 contract is for 1 gram of paper gold) at an option fee of 3 RMB each you will invest 300 RMB. Three situations can result:

1) If the spot gold price reaches above 158 RMB/gram

If the spot price of gold hits 161 RMB than the option contract value becomes (161-155) = 6 RMB for a profit of 600 RMB. Your return is (600-300)/300 = 100%. If you had invested in paper gold for 155 RMB per gram the profit is the same.

For the paper gold bought at 150 RMB/gram the return is 1100 RMB/15,000 = 7.33%

2) If the spot gold price is between 155 and 158 RMB

At this point the option still has value although it does not reach the investors break-even point. However, one can sell the contract to lower the losses.

For example, if gold were at 157 RMB/gram at this time the option would be worth 2 RMB each for a total of 200 RMB and in the end this investment would have a loss of 100 RMB.

3) If the gold price is lower than 155 RMB

In this case the value of the option is 0. The investor should not exercise the option and incur losses of 300 RMB. The paper gold the investor purchased is also in a losing position.

This is a small reminder that the options limit risk and are invalid after the expiration date. Moreover, though paper gold values can still exist, the investor needs more capital compared to buying an option. Also, the carrying risk of holding paper gold extends to the entire value of the gold while the risk for the option is solely the option fee.

Hedging Using Both

As physical gold and paper gold are not completely the same, gold options can be bought low and can be used as protection for paper gold investors as part of a portfolio.

This expert continued to explain: suppose that gold prices were at 150 RMB/gram, and a call option at 150 RMB/gram from the bank for a one month period costs 3 RMB per contract (contract for 1 gram of paper gold). If there is not a situation where gold falls below 150 RMB/gram then you exercise the option to buy the gold. Generally when gold falls below this level the investor will start losing money with the entire 150 RMB purchase price potentially at risk.

If in buying paper gold, at the same time you can buy relative protection by also purchasing gold put options. The exercise price of the put option is also 150 RMB. If gold falls below 150 RMB the put option will start acting as a hedge against paper gold losses.

No matter how far the gold prices fall, the put options give option holding investors the right to sell paper gold at 150 RMB. For this reason the price decline risk is limited to only 3 RMB. The total cost of the gold and option is 153 RMB while reduce the risk by 150 RMB. The advantage of this strategy is it allows investors protection from downside risk. At the same time, there is unlimited upside for the 153 RMB initial investment. The only drawback is that gold prices must reach at least 153 RMB before investors start making a profit.

The Risk is Smaller than that for Gold Futures

As compared to gold futures, the risks of gold options are relatively small. When investing in gold futures, the customer immediately faces a risk of not meeting the margin requirement. When opening a position that makes the investor face immediate market fluctuations, it is convenient to have appropriate expectations and be able to add to your margin account at a moment’s notice. Otherwise, this trade could potentially overwhelm your position. Customer potential losses are not limited to the upfront margin, but all funds the account holder has. Because the Chinese gold futures market changes are influenced by international market fluctuations, there are frequently fluctuations due to overnight trading in New York (Ed. China’s time zone is exactly off NY by 12 hours). For this reason, it is rare for the domestic gold prices to not experience sharp jumps. Therefore, investors positions have an increased trading risk as well.

In summary, when trading gold options, the customer is already certain upon purchase that the largest losses that can be incurred are the option fee that is paid to the bank. In the future, no matter how the gold price fluctuates, the customers greatest possible losses are already certain. Only within the option exercising period (up to the expiration date) can market fluctuations profit the customer and customers can choose the point at which to exercise the option and lock in their profits. Before then, they do not have to worry about the large negative fluctuations in the market.

(Editor: Huang Wenting)

Local News: Chinese gold sells fast in Huangshi, Hubei province

Chinese gold bars sell fast at Huangshi

China Gold News (newspaper)

April 29, 2008

By He Xi'en and Zhang Jing

According to the newly inaugurated Gold Phoenix Jewelry Building, on April 17, China investment gold bars began selling in Huangshi, Hubei province and have already successfully passed test markets. In four days, the amount sold exceeded 600,000 Chinese Yuan setting a new sales record for a product at Huangshi Gold Jewelry market.

On April 18, the second day of China gold bar sales at Huangshi, even the heaviest standard bar, 1000 grams, was sought by customers. According to sales people, in nearby Dazhi City, a local businessman traveling out of town heard of the gold bars being sold in Huangshi and immediately called Gold Phoenix to confirm. Afterwards, he entrusted a family member to come first and purchase the bars and in addition to the 1000g bar bought 3 50 gram gold bars as well. The salesperson says: “This type of buyer emphasizes the function of gold in preserving value, and normally buys a large quantity.” According to Gold Phoenix Jewelry Store Physical Gold Exchange Group’s salesperson, different customer demands require different sizes of gold bars and the highest selling bars are the extremely large or the extremely small weight ones.

Customers whose purpose is to preserve their wealth normal choose the large weight gold bars, their age is about 40, and are usually people with high incomes such as those in finance, company managers, high school principals, etc. Customers who purchase gold bars as gifts for friends, loved ones, or for themselves usually choose the 100 gram and 50 gram small weight gold bars. Many customers buy many bars at once. There are also some older customers who buy many gold bars at once in order to give them as gifts to younger relatives or to store. “The sales area seems like a stock trading company office.” Gold Phoenix Jewelry Store Store Manager Zeng Yilin describes the new model of selling Chinese Gold Bars. “Chinese Gold Bars are sold at the real time price following the international spot gold price. The gold bar price fluctuates once every half hour. On the basis of the international spot gold price, each gram receives 10 yuan more for a sales handling fee. The buyback fee is 2 yuan for each gram. Customers can choose for themselves at which price to resell their gold.” According to Zeng Yilin’s introduction, after the gold bars began selling at Huangshi on 4/17, Gold Phoenix Gold Jewelry Store each day receives a large amount of interested customers. “Gold bar sales have their highest concentration around 10:30AM and 3PM. Most consumers can understand the idea of gold as an investment pretty well. A few customers first pay to reserve their gold bars and come pick up the bars on a later date.” Besides them, each store every day receives a large number of phone calls inquiring about gold prices which sales people must answer truthfully. To this end, each store allows a “stop order” service where a customer can specify a price point and leave their phone number. If the gold price drops below this price point, the gold store will contact the customer first so that they can come purchase the gold. The China Gold Association Vice Chairman and Wuhan Gold Ornament Jewelry Industry Association Chairman Meng Hanhua believes Gold Phoenix Jewelry Store sales of gold bars provide a new investment channel for residents of Huangshi and provide a new model for gold sales in Southwest Hubei province.

China/Japan/Korea and ASEAN set up emergency currency reserve

Not specifically about gold but very interesting talking about the new reserve the Asian nations are using to tackle another financial crisis and how they hope it will supplant the IMF in Asia.

Chinese, Japanese, and South Korean leaders prepare a $80 billion joint reserve to defend against an Asian financial Crisis

Asia Times (Chinese)

May 6, 2008 issue

By Luo Shaolan

Translated by China Gold News (Blog)

The finance ministers of China, Japan, and South Korea along with the those of 10 ASEAN countries agreed on May 4 to establish an $80 billion joint foreign exchange reserve fund to assist the participating countries in the event of a financial crisis. In establishing the "Asian Monetary Fund", the reserve requirements are similar to the International Monetary Fund's reserve and will seriously weaken the role of the IMF in stabilizing international finance.

The finance ministers of each of the countries agreed that China, Japan, and South Korea would contribute 80% of the funds while the other 20% would come from the 10 contributing ASEAN members. Additionally, the thirteen countries will have about one year to determine how the organizations’ structure and activities will be set up. After this point, the members can being using the reserves.

The origin of the Asian Monetary Fund was in the 1997 Asian Financial Crisis and its widescale losses among many countries currencies. At that time, the IMF’s help was inadequate and its conditions were extremely exacting. Afterwards, the nations of East Asia started to search for areas of cooperation to prevent another crisis and protect finance. As early as late 1997, Japan then suggested establishing a regional monetary fund but at that time encountered the heated opposition of the United States. Afterwards, in 2000 the 13 nations finally signed a mutual framework for creating a regional monetary exchange “Agreement of Intention”. On the basis of this agreement, the thirteen national again agreed in 2007 to use sections of their foreign currency reserves to establish a multinational fund for use in an emergency situation but in the end did not decide the fund’s framework.

This time, the finance ministers agreed for the monetary fund’s base of $80 billion in order to protect financial stability for the thirteen member countries. This fund it can be said is very adequate given that the IMF’s current reserve is about $200 billion but for 184 member nationals with a global scope.

The basic use of these $80 billion of reserves is for necessary use as a direct attack against short term investment crises, maintaining Asia’s finance in favorable conditions, promoting the reform of monetary institutions, and maintaining Asia’s monetary stability and liquidity. It can be pointed out, given the current derivatives disaster regional foreign exchange systems will become more harmonized over the long-term. Due to China being particularly interested in establishing an Asian debt securities market, the region is extremely likely to see its own debt insurance, rating, and related auxiliary institutions.

Japan advises that each country’s foreign exchange should focus on a currency basket of yen and euros and at the same time emphasizes that if an Asian Monetary Union is uncapable of being created in the short-term, they should think of establishing multiple smaller currency areas. On another hand, South Korea put forward the idea of an “Asian Currency Unit” which would not be a standalone currency but a type of currency based on the thirteen country’s currency values, GDP, and trade and would be a valuable virtual currency system. This would allow each country’s central bank to conveniently balance out currency fluctuations without causing undue harm.

At the same time working for the stability of Asian currencies, China is also focusing on establishing an Asian debt security market. It recommends founding Asia’s own debt insurance and rating agencies. Although, East Asian countries nations hold the world’s largest reserves, Asian debt is still not rated particularly high on international markets. China believes on one hand encouraging debt for large enterprises and encouraging transnational projects, and on the other hand establishing Asian debt insurance and ratings agencies to attract the interest of American and European investors as well as promoting the sales of Asian debt.

Although the three nations of China, Japan, and South Korea do not see eye to eye on the functions of the Asian Monetary Fund, they are brought together by the common cause of seeing the IMF as relatively inadequate. The IMF can be understood as the institution of the wealthy American and European nations to assist poor nations in establishing monetary stability. In the past several decades, it has had a large influence on international finance. It emphasizes protecting western “free market economy” modes of thinking. Towards the recipient nations are placed many sorts of demands, for example completely liberalizing the economy, large scale cuts in government expenditures, and even high interest rates. These sorts of measures are frequently criticized as being geared towards expanding the trade of western nations and are a poison to the recipient nations’ economies.

Following the global economies shifts of power, the IMF is no longer as influential. Past economic crisis countries such as Brazil, Argentina, and Russia already have sufficient capital reserves and Asia has even more unmatched foreign exchange reserves. The past year has presented many problems for the IMF which encountered its first operating loss. As the modern Asian nations increase their foreign reserves, it increasingly relegates the IMF to a relatively useless position.

Shanghai Gold Exchange - Detailed March 2008 Stats

CLICK HERE for the file. Probably best to download the Excel file.

May Day Sales Promotions in Lanzhou

Article about May Day holiday sales promotions in Lanzhou, Gansu province in Western China. May Day has traditionally been a week-long holiday but was only one day this year. Sales, mostly geared towards weddings, are still booming though...

Lanzhou: Jewelry Markets Promotes Wedding Brands

China Gold News, April 29, 2008

Reporter: Chen Wen

Translated by China Gold News Blog

Recently, the reporter has visited several large jewelry markets in Lanzhou and has come to understand that although the May Day holiday has been shortened (Ed.--Starting this year the Chinese government shortened the traditional May Day holiday from 1 week to 1 day) consumer demand has not slackened. Consumers in the recent weeks have especially showed a energetic demand for gold jewelry.

Starting in mid-April, Lanzhou’s large markets have consistently pushed continued to push sales as in years before though a bit differently this year. These promotions have been centered around weddings and “romantic’ buyers and have altered service accordingly.

Like most, Guofang Baisheng Diamond Market has a major sales period during April but has concentrated on cashing in on the May Day period rise in weddings. Shenzhen-Lanzhou Friendship Jewelry as usual from April 18 started a 23 day Shenzhen-Lanzhou Jewelry Fashion Festival; Yongchang Diamond has promoted 8 weeks of activities in its stores; Dijue has started strong promotions with wedding and love themes; Century Jewelry City has announced a series of activities to promote its normal prices; Longxi Sheng Silver and Gold Store from April 20 began a 20 day promotion, promoting may wedding and romance themed products. Gold and platinum jewelry is still priced according to daily international gold and silver prices.

The reporter understands from these markets that post-April the jewelry sales slowly reach a hot period but the sorts of sales dominating last year’s May Day holiday are not as pronounced. From the viewpoint of consumers, the upcoming period is an important wedding season. This crowd has accounted for about 80% of buyers while consumers over 35 buying for anniversaries have accounted for about 20% of buyers. From the view point of consumer sales, the Spring-Summer transition time has many business opportunities to seize. This is the goal of many jewelry markets who continue to promote sales as with last year with the week-long May Day holiday. Shenzhen-Lanzhou Friendship Jewelry’s managers say that the long vacation has been shortened but consumer demand for jewelry has not abated. Lanzhou Market’s Thousand Feet Gold prices have been between 263-278 RMB per gram while Platinum has been about 428 RMB per gram. “Although gold prices have pulled back a bit customer demand is being driven by a broad trend amongst diverse products. For this reason, we believe the sales jump is a mainstream one despite the shortening of the former holiday,” the managers stated.

(Ed. Note: Other articles note similar wedding promotions in Jewelers around the country).

World Gold Council K-Gold Project in China

Interesting article about the interaction between the World Gold Council and China. Describes the K-Gold project which is helping bring modern designs and techniques to China.

World Gold Council states: China’s K-gold project development is the leader in the Far East

China Gold News, April 29, 2008

Reporter: Li Shen

Translated from Chinese by China Gold News Blog

On April 15, The World Gold Council at Beijing’s 798 Arts Center unveiled the 2008 K-Gold 18K gold jewelry kicking off efforts by China to promote the 2008 K-Gold. After the presentation, World Gold Council Far East Managing Director Albert Cheng (Zheng Lianghao) accepted a China Gold News reporters questions stating "The K-Gold program has brought about great results for China. China’s K-Gold project development in the Far East is without peer. It is greater than Japan, Singapore, Malaysia, Thailand, and India among other countries.” In 2003, the World Gold Council approved the K-Gold 18K gold jewelry project and a representative of Italy’s highest quality line of products, Gold Expressions, came to China in order to bring new pioneering new ideas and techniques to the Chinese Gold Industry. As a result, the Chinese gold jewelry industry has shown many positive and progressive developments. According to the World Gold Council statistics, in 2007, China’s gold jewelry demand jumped to the second place among all countries at 302.2 tons, passing the US and second only to India. In addition, China has received the most attention among the top five countries. Albert Cheng states, within the five years of the K-Gold program, China’s gold jewelry has made a great leap forward in development. This includes the use of chemical catalysts, the promotion of Chinese gold jewelry become more stylish, and modernization all of which have accelerated China’s gold jewelry industries changes and satisfying the array of customer demands. This promotion of China’s 18K gold market has experienced comparatively rapid growth. The market share of 18K gold jewelry in China’s gold jewelry market has been growing as shown below

Year	Market Share %
2003	5%
2004	11%
2005	15%
2006 & 2007	18%

In the development of China’s gold jewelry market, 18K K-Gold jewelry has also achieved its own organic development. In the five years since 2003, the K-Gold project industry designers have also adapted more fashionable techniques helping lead to the wave of consumers buying K-Gold jewelry. However, following the increasingly wide spread of K-Gold, consumers' demands have become more complex and the 18K gold industry has begun to face more challenges. About this, Mr. Cheng states, that as the number of customers increases, promotion strategies must be adjusted understanding true customer demand and customer trends in the marketplace. Moreover, the World Gold Council will continue to promote the link up between the Chinese and Italian businesses as well as incorporating China’s rich culture into the K-gold project implementation. Mr. Cheng emphasizes that the “Sinification” of the K-Gold project does not mean that 18-K jewelry must be completely modified for local cultural tastes. “This will cause K-Gold to go to one extreme. K-Gold will also become an international product and will represent the tide of international fashion. In the future, it will emphasize a fusion of the two.”

This year’s Beijing Olympics will provide a positive impetus for the development of all of China’s industries. Vice Chairman Cheng concludes, “Beijing is not only China’s capitol but a center of business and culture. From this excellent foundation, we can see lifestyle and fashion consumers. We hope that K-Gold along with the 2008 Olympics will together become the pride of China.”

A Concise History of Gold in China

China’s Gold: The Eternal Treasure

By Sang Shang,

Business Culture magazine

2007, No. 19

Translated from Chinese by China Gold News Blog

China is a “gold poor” country. The total amount of gold held by both private citizens and the government reserves amounts to between 4000-5000 tons of gold. Compared to the global average per capita gold held by private citizens, China’s per capita gold is about 1/10 of the average. Although China was the first company to exceed $USD 1 Trillion in foreign exchange reserves, the fraction of these reserves in gold is very small. Last year’s announced number was only a bit over 600 tons. Compared to America, Germany, France and even Italy this is much less. In terms of overall rankings, China ranks about tenth place or so in terms of gold reserves.

Thinking of ancient times, before the Qin and Han dynasties, seen and recorded gold rewards or transactions frequently ranged from a few dozen to 100 jin (a jin is about 16.1 troy ounces). After the Han Dynasty, this level of abundance was never seen again. There are two theories regarding this occurrence. The first says that what the ancients so-called gold was actually copper and not really gold. The second theory is that the previous riches of the ancients were frequently hidden by their owners in the chaos that surrounded the collapse of the Han Dynasty (about 220 AD). According to this theory, most of the pre-Han gold disappeared or was hidden underground. No matter what you believe, it is a fact that after the Han Dynasty the amount of gold in China has continuously been very little.

In recent times, there is a complicated legal case due to the fact that the retreating Nationalist Government took all of the gold reserves to Taiwan after the revolution. Relatively reliable estimates of the amount of gold shipped range around 2.77 million liang (similar to tael; a liang is 50 g and about 1.61 troy ounces; total about 139 metric tons). The highest estimate is 28 million liang (about 1400 metric tons). How much gold is 2.77 million liang? About the total domestic gold production of mainland China from 1949 to 1964. For this reason, it can be said that the current Chinese renminbi rose from a start of only about 6000 liang (0.3 tons) of gold.

Before fleeing to Taiwan, the Nationalists forced citizens around China to hand over their gold bracelets, hidden stashes of gold, and silver bars which were all declared illegal. Soldiers entered private residences to search for gold that had not been turned in. Those who were caught were sent to jail. It is said, a man at that time named Mei Lanfang had skillfully collected several hundred liang of gold over the years and after turning in all his gold an unaccounted gold bracelet was discovered.

After the establishment of the communist government, the People’s Republic was forced to face this serious problem of a paucity of foreign exchange. There was neither gold nor US dollars. This continued to the beginning of the land reforms and according to the records at the lowest point there were only a total of about a few tens of millions of US dollars. However, if a country wants to develop it must receive large imports of needed products. At that time, except with other communist countries with which it was easy to barter with, dealing with Western countries it was necessary to get hard currency. In order to get hard currency there were two main methods: one was to save food and clothing to export for foreigners to buy in order to obtain foreign exchange. There are two examples of this. One was two years after the “Great Leap Forward” although the country was starving, grain was still exported. The other was fishing for large amounts of prawn in the waters near China. However, the vast majority of Chinese were not familiar with how to handle prawns.

Another method of gaining foreign exchange was to once again search homes for gold. After the founding of the People’s Republic, gold trading was placed under a state monopoly and it was illegal for private individuals to trade gold between themselves. They could only sell it to the People’s Bank of China (the Chinese central bank). Although in theory it was still legal for private individuals to hold gold, in the political climate of the times, to privately hold gold and not support the state programs had become unconscionable and evidence of lacking confidence in the New China. Under these circumstances, the hidden private gold of Chinese citizens once again flowed to the state. There are a few difficult to verify figures on the amount of gold. It is said in 1950 alone, Guandong province turned over more than 7 million liang (about 350 metric tons). No matter how you calculate it, it is an undisputable fact that for the 30 years after the revolution, the gold held by citizens went to the government. This gold was basically all used to import goods and was not stored as reserves. Therefore, twenty years ago, most Chinese people had never seen gold of any type with their own eyes and it almost became a metal of story and legend.

Since China historically had very little gold, therefore gold did not have the opportunity to become a mainstream medium of exchange or become minted into a standard coin. China also is short of silver and before silver was imported in large amounts China’s most important coin was copper. First there was a green copper coin and later the yellow copper coin emerged. Therefore, in the flowering period of Western Han power and prosperity, most of the money in the warehouses was described as stored away and rarely circulating copper coins.

But China’s copper was also relative scarce and the shortage of hard currency was a constant pressure the Imperial Court had to face. Therefore, sometimes there were some types of silk fabrics that could be used as currency. In historical writings, the emperor gave rewards with large quantities of these fabrics. In fact, it was the same as rewarding someone with money. Lack of hard currency was another factor in the birth of the world’s earliest paper currency in China.

After the Song Dynasty (around 1279 AD), China’s flow of silver gradually increased. The first silver came from Japan and later from America. China slowly adopted silver currency and used a silver backed currency. The early Republic of China’s Silver Yuan is the best example of this. However, after the 1840s, because of payment of foreign reparations, China’s silver again became scarce. By the 1930s, the Nationalist government was issuing legal tender pegged to the American Dollar and British Pound. One can say this was not particularly sound monetary arrangement. Then the war against Japan nearly destroyed China’s economy and this system became untenable. In the end, the government issued money lost all credibility and became completely worthless.

After the Revolution, the renminbi has presented as a precious metal backed currency valid throughout the whole country. In the following decades, although it still is not fully convertible, it is accepted as hard currency around the country and is becoming an increasingly strong global currency. In reality, throughout the last several thousand years of Chinese history, the lower classes have rarely had a chance to touch gold or silver. “10,000 liang of gold! (unimaginable wealth)” and “Three years of good governance, 100,000 pieces of sliver (meaning a period of good governance was often followed by corruption)” are sayings that reflect the reality that the people who actually saw gold or silver were very few. Knowledge and understanding of the relationship between gold currency and weights and measures was not widespread.

Today, gold can be measured in three main units: grams, ounces, and liang. The gram is simplest. 1000 g make up 1 kg; an English ounce is 28.35 grams. But most gold is measured in troy ounces which is 31.1 grams. 1 troy ounce is 1.1 regular ounces. The liang is most complicated. There are 50 g in one liang; there are ten liang in one jin. Today, many gold bars are 1 liang (50 grams). There is also an old liang also called the kuping liang or the sima liang. There are 16 old liang in one old jin. This liang, is currently used in the Hong Kong gold market and is known as a tael and is 37.43 g. This is the standard left over from the Ming and Qing Dynasty. The modern 1 tael of sliver is about this weight. There is one more unit, the “small liang”. It’s origin was the reform in the weights and measures made by the Nationalist government during its time in power. This unit was set where a kuping jin was 500g in weight but in order to keep the standard familiar to most common people, there were still 16 small liangkuping jin. This small liang is set at 31.25 grams and is not much different from a troy ounce (1 small liang is 1.00471 troy ounces). Therefore, if someone says he hays 100 liang of gold, you must ask him to clarify which liang he is using. to one

So what do you do with gold? The general answer is that it can preserve and increase wealth. In reality, this is a bit of an incomplete description. First, regarding increasing wealth, capital can only increase in value once it is put back into circulation. The increase in value is seen after gold is exchanged again. The greatest weakness of gold is that there is no way to generate interest. There is no bank that will let you deposit 1kg of gold and come back a year later to withdraw that 1kg of gold along with 50g of gold interest. This weakness helped push gold down to its lowest point in 20 years in 1999 at 252 US Dollars per ounce even as gold extraction prices were rising. In the end, the world’s central banks signed the Washington Agreement to maintain gold at its then current level.

Its ability to preserve wealth is also a difficult aspect to describe. In fact, due to the relationship between supply and demand as well as the change in the extraction rate, over a long time the price of many commodities versus gold can fluctuate up and down over time. Most importantly, the rate of increase in the global money supply is faster than the appreciation rate of gold, so the share of gold in terms of the total money supply is steadily shrinking. 100 years ago, 100 ounces of gold was a small fortune anywhere in the world. These days, at best this could only make someone middle class.

From the perspective of investment opportunities, gold is still not necessarily always a good investment. Its value can often fluctuate wildly. From 1944 to 1971 gold was fixed at an exchange rate of $35 per ounce due to the Bretton Woods agreement. After the agreement was scrapped in 1971, throughout the 70s gold went on a bull run and because of the War in Afghanistan hit a high of $850 per ounce in 1980 (about $2000 per ounce in current dollars). Later it hit an all-time low in 1999. In the most recent year has risen over 100% to the current price of about $670 per ounce. This is comparable to a stock market, foreign exchange, or futures market return but such performance for gold is hard to come by.

Therefore, are there still other attractions to gold? First, the separation of legal tender and precious metals has only a short history of several decades while gold has been a medium of exchange possibly for up to 10,000 years. Legal tender money is completely based on the belief that it can be used and accepted. In normal times we don’t need gold but if one day there is some sort of loss in confidence in money, what then?

Second, is the durability of gold as a material and its rarity. In total, including gold put into circulation and reserves about 200,000 tons of gold have been mined throughout history with a current value of $4.2 trillion. You could only say there is more if you believe in the mythical alchemy of creating gold or found a mountain of gold in the middle of a rainbow. Moreover, the current consumption is exceeding new discoveries of gold. Each year the world exchanges about 3000 tons of gold and 15% of this is used in industrial processes. This portion is extremely difficult to recycle. At the same time gold extraction costs are increasingly higher and are now at about $300 per ounce. This is the lowest possible price gold should ever fall to. Holding gold is also a form of personal investment diversification and a form of insurance against a disruption of normal activity in society and the economy. You shouldn’t own too much but you should not go without.