Chinese Speculators Play on: Is Gold the Next Bubble?

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There is a feverish quality to Chinese speculative investing, a tendency for the herd to rush into the next asset or instrument as though this for certain going to be the Bonanza Strike, the one that puts us over the top.

 

Bubbles can inflate in no time, and it seems that no asset is immune.  (According to a recent Economist report, even the price for fresh garlic has recently spiked on speculation.) Bubbles then burst, and are followed by woe, but not generally for long, because soon there will be a new fashion asset to glom onto.

 

The latest one is a very old and traditional one, bright and glittery and less perishable than garlic.  It is gold.

 

At present there are hundreds of underground gold speculation companies opening channels for domestic investors, attracting nearly 100 billion yuan in private capital. Behind the frenzy, the froth is churning, but it is the hidden risks that are ready to swallow investors' wealth.

 

Domestic periods for investing in gold futures are fixed and limited, but the gold markets in the Europe and the United States are open 24 hours a day, with ever-present investment opportunities to make, and lose, money. A number of domestic branches of foreign securities brokers are involved in the underground gold speculation. Compared with the domestic leverage rate of 5-10 times to invest in gold futures, they provided leverage rate of 100-400 times, which means the trading of one hand of gold (100 ounces) needs only a deposit of $1,000. So the capital gains are more than 10 times higher than those at home.

 

However, the costs to speculators are very high. They must pay $20 for each transaction, and a 7% point difference (the different amount of sales proceeds of each transaction) regardless of profit or loss. If investors hold a hand of gold on long option overnight, they need to pay interests of $3.50. On the contrary, if they hold on short option overnight, they will gain $1.30.

 

The current underground gold speculation companies fall into three types. The first type are channel traders. They are gray branches at home established by foreign securities brokerage firms, providing a legal trading platform for domestic investors to invest in overseas gold futures, and making money mainly by charging fees. The second type are companies playing the roles of both channel providers and market makers. On the one hand, they make their own trading platform and clear contract positions of most clients, leaving the remaining net of long and short positions to foreign trading platform to match the deal. On the other hand, they play as counterparty with their own money with investors. The third type are companies developing their own trading software and becoming rivals of investors. All of these companies package themselves into standardized investment advisory companies.

 

Many investors don't know whether they lose their money because of investment failure or if it is being swallowed by underground gold speculation companies using tricks. Some domestic brokerage agencies with headquarters in Hong Kong provide overseas gold futures investment business with the leverage rate of 200 times. However, the fact is that deposits invested by clients when opening an account in Hong Kong are fully transferred to the brokerages' domestic accounts. They trade only in their self-designed trading platform and never transact a penny in the standard foreign futures market.

Even though many domestic speculators know that gold investment is highly risky, with loss of nine out of ten, they are confident they belong to the 10% lucky ones. Many underground speculators in gold use their own trading platform to settle position ordered by clients. Point difference becomes the new profit growth point for all underground gold speculation companies.

 

Some companies use tricks in trading software, and play counterparty with investors, gaining clients' deposits.

 

Some illegal underground gold speculation companies develop their own trading system, or adapt other mature futures trading systems, delaying trading 10-20 seconds to see the change of gold prices. If they find customers make the right decision, they submit the trade to the foreign trading platform. If they find investors make a wrong decision (they buy long option, but price of gold shows a downward trend), they quickly play the counterparty with investors and make money nine out of ten times.