A perfect storm in gold may be brewing in China as ETFs, yuan fix take off

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Signs of Chinas ongoing love affair indeed, obsession with gold are surfacing almost daily.

A key metric of Chinese gold demand is activity on the Shanghai Gold Exchange. SGE withdrawals for the month of March totaled a brisk 183 metric tons, signaling that domestic wholesale demand remains robust

The Chinese of course are buying jewelry, coins, and bullion bars, but more Western-style investment products linked to gold also are starting to gain traction.

ETFs report surging inflows: According to a Reuters report, two major Chinese gold ETFs have seen investors flocking to their products. The HuaAn ETF saw its holdings leap to 13.5 tons at the end of March from 3.2 tons at the end of 2015, while Bosera Asset Managements ETF recorded a 63% increase in holdings from the end of last year up through March. New gold-linked products are being introduced almost daily, such as one tied to the futures price from China Merchant Securities.

Growing confidence in golds price rally is underpinning investment demand for the metal in top consumer China, even during its post-Lunar New Year period, when buying is traditionally weaker, Reuters reported.

Faith in equities has been lost: We think that there might still be some shocks and uncertainties coming around from global markets that might be driving the risk aversion trade, HuaAns Richard Xu said. And GFMS analyst Samson Li added that The Chinese have lost faith in the domestic equities market and remain cautious towards the property market which left gold as one of the more sensible investments. A perfect storm in gold may be brewing in China.

And that perfect storm might even start to be felt in Western gold epicenters like London. The Shanghai Gold Exchange has announced updates on its new yuan-linked gold benchmark. Eighteen institutions, some Chinese and others not, will participate.

Major Western banks joining: Standard Chartered, ANZ, and Swiss trading house MKS will be among the 18 members, while Chinas largest banks and gold retailers will fill out the rest of the roster.

As the worlds top producer, importer and consumer of gold, China has balked at having to depend on a dollar price in international transactions, and believes its market weight should entitle it to set the price of gold, Reuters reported. The new yuan-linked gold fix will launch April 19 and could ultimately give Asia more power in setting the global gold price.