In recent years, expansion into tier three and four cities has been a major strategic focus for many Chinese jewellery retailers. Chow Tai Fook (CFT), a leading retailer based in Hong Kong, added 251 points of sales (POS) in lower tier cities in 2018 compared to only 50 in tier one cities.1 Lao Feng Xiang, another large jeweller with 3,521 POS domestically, also prioritised expansion into lower tier cities.2
While tier one and two cities are better positioned economically, politically and socially, tier three and four cities shouldn’t be disregarded. As shown above, consumers from lower tier cities contributed significantly to the overall sales for CFT in 2018. And other jewellers have told us the same. But what are the key reasons behind this strategic shift into lower tier cities?
Feeling the pressure: still profiting, but at a lower rate
Jewellery retailers’ profit growth has slowed in the past five years. Some retailers have even seen net profits shrinking over the period. Most of them have made efforts to address this: high-margin and innovative products such as 3D-hard gold and “5G” gold have been promoted heavily.3
Product innovations and new market opportunities are essential to all retailers. While there is no shortage of innovation among China’s jewellers, they need to find relatively untapped markets as the competition in tier one and two cities is fierce. Consequently, most jewellers have prioritised plans to expand into lower tier cities. But what do they see in lower tier markets?
Rising consumption potential in lower tier markets
At the July Political Bureau Meeting – a monthly meeting where the president and most senior government ministers determine economic policies – boosting consumption was listed as a vital policy goal. Lower tier cities and rural areas have been the focus as these markets have larger room for consumption growth: disposable income growth rates are higher when compared with higher tier cities.
Faster growing incomes mean an improvement in the quality of life - reflected in the sliding Engel’s Coefficients of these areas.4 As consumers in these cities are spending proportionately less of their incomes on food, they are able to divert more of their disposable income towards other goods such as gold jewellery.
And this seems to be reflected in retail sales data. Lower tier cities’ (tier three and below) proportion in total retail sales in China is rising steadily. In 2017, more than 50% of total retail sales came from lower tier cities.
In lower-tier cities, the average personal income is growing at a faster rate, and more importantly, these consumers are willing to consume.
What do they prefer?
Discussions with the industry indicate that jewellery consumers in lower tier cities are much more traditional than those in big urban centres, preferring high purity products. To them, value preservation outweighs design. But demographic changes could be leading to changes in tastes. And it is increasingly becoming clear that younger generations are at the heart of this change.
Our consumer research in 2016 showed that instead of the traditional 24K gold jewellery, 18K gold jewellery is the popular choice among younger generations.5 The lower entry cost and broader array of designs made 18K gold jewellery more attractive to younger consumers with a desire for enhanced styles.
This year, we will be publishing an update to our consumer research which will allow us to see if consumers’ behaviour has changed further over the last three years and shine a spotlight on the fast-changing tier 3 and 4 cities.
Lower tier cities: driving future growth
Jewellery retailers’ expansion into lower tier cities has been a clear trend in recent years. And efforts to move into these markets have led to rewards. Some retailers have reported higher sales growth in lower tier cities than in tier one and two cities. And this expansion trend is likely to be a long-term phenomenon. With a large consumption potential, lower tier cities’ consumers might soon become the driving force of China’s jewellery demand.
4Engel’s Coefficient refers to food consumption’s proportion in a family’s total expenses. The higher the number is, the poorer the family could be and vice versa.
Why gold is under-represented in commodity indices (ranging from 3% to 12%) despite its clear differentiating benefits
Why gold is the most effective commodity investment
Standing apart from the commodities complex, gold is a differentiated asset because it has historically benefited from six key characteristics:
1. Better long-term, risk-adjusted returns than other commodities and broad-based commodity indices.
2. More effective diversification than other commodities, particularly in market downturns, with no meaningful correlation to oil over time.
3. Better performance than other commodities in low inflation periods.
4. Lower volatility than most single commodities and similar volatility to broad-based commodity indices.
5. Proven store of value as commodity values fell sharply against gold following the end of the gold standard.
6. High liquidity.
Ultimately, while commodities can be a relevant tactical asset, a strategic gold allocation of 2%-10% can supplement or replace a broad-based commodities investment alone and may offer more widespread benefits and better risk-adjusted returns.
Gold fell last week (XAU -1.2%, LBMA -1.4%) as the stock market rallied and yields rose the most in six years.
Gold fell back to the important level of ~$1,500 which could act as support in the interim.
Potential gold price drivers this week:
Oil had the largest intraday move in history last evening following the Saudi Arabia oil field bombing which impacts 5% of the global oil supply; this has gold bid with concerns about potential retaliatory actions.
Rate decisions from the FOMC, BOE and BOJ could drive gold prices; US markets are pricing in 25bps cut.
Markets will continue to weigh news out of the UK where PM Boris Johnson is expected to meet with EU officials on Brexit.
Quadruple-witching in the US on Friday, when expiration on futures and options on indices and stocks occur on the same day; this is often met with increased volatility and volumes.
Liquidity:
COMEX net longs fell sharply from 1,134t to 963t, still near all-time highs and well above long-term averages as the price of gold fell for a second week in a row.
Gold trading volumes also fell sharply last week as we received some late August OTC data; levels went from $238bn a day to $209bn a day; this remains 83% above the 2018 average.
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF Flows:
$760mn worth of outflows globally last week mainly coming from the US (-$610mn) and Europe (-$178mn). Other regions had minimal flows.
Flows are mostly flat for the month (+$187mn) with all-regions except Europe with small inflows.
Gold-backed ETF flows last week
Source: Bloomberg, World Gold Council
Options and volatility:
$2.8tn worth of gold futures option open interest at the $1,500 strike over the next two months; many multiples higher than traditional amounts. $2tn at $1,550 and $2.4tn at $1,600 which was added last week.
Implied and realized volatility both fell last week as gold hovers around $1,500.
Call skew increased near the one-year highs as investors likely added to bullish bets following the pullback.
Put skew increased sharply as investors began to buy downside protection.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third-party content, including Metals Focus, is the intellectual property of the respective third party and all rights are reserved to them. World Gold Council is affiliated with Metals Focus.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified third-party source, as their source.
World Gold Council does not guarantee the accuracy or completeness of any information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is not a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. We assume no responsibility for updating any forward-looking statements.
Those familiar with our work will already know that we are unashamedly fans of gold. And for a very good reason we’d argue. While it is without doubt our focus, it would be wrong to say that we analyse it in a vacuum. In our recently published report Gold: the most effective commodity investment, we looked at how gold is under-represented in the commodity indices investors often use to gain exposure. This can have unintended consequences on portfolio performance, especially when other commodities – such as oil – can have significantly different characteristics than gold.
The drone attack in Saudi Arabia on 14th September highlighted this. The event resulted in approximately 5% of global oil supply being taken offline. In response, global oil prices initially spiked by 20% before partially falling back. A major reason for this reaction is that the global supply of oil is concentrated. Looking at data from the US Energy Information Administration, the top 10 oil producing nations accounted for 70% of global oil production in 2018. (Saudi Arabia – the world’s second largest producer – accounted for 12%.) What’s more, half of the list are situated in the Middle East region.
Global gold production, on the other hand, is more geographically diverse. The top 10 producing nations only account for 60% of the global total, with no single producer accounting for more than 12%. And the concentration risk is far lower as gold is mined on every continent except Antarctica. This diversity in mine production helps to create a more stable supply chain, less susceptible to supply shocks. This, in turn, helps to reduce price volatility. Gold has a significantly lower annualised volatility (16%) than oil (32%), and many other key commodities. It’s also worth noting the lack of a consistent relationship between gold and oil prices.1
Questions surrounding this event and rising tension in the Middle East, will only add to the fog of uncertainty, highlighting to investors the need for risk management to protect their wealth. And the rise in uncertainty is likely to benefit gold. In recent editions of Gold Demand Trends, we have written at length of the likelihood that geopolitical uncertainty (in addition to low/negative interest rates and dovish monetary policy commentary by central banks) will drive investment demand higher.
1 Investors also tend to access the oil market via the derivatives which will increase counterparty risk.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third-party content, including Metals Focus, is the intellectual property of the respective third party and all rights are reserved to them. World Gold Council is affiliated with Metals Focus.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified third-party source, as their source.
World Gold Council does not guarantee the accuracy or completeness of any information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is not a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. We assume no responsibility for updating any forward-looking statements.
Gold rallied on Friday following the LBMA fix which left the fix price flat on the week and XAU higher (XAU +2%, LBMA -0.1%) as yields fell following the Fed rate cut which left the market thinking the ‘organic growth’ Powell discussed could represent future QE.
Gold price
COMEX net longs moved higher from 968t to 1,021 after falling the previous week.
Global gold trading volumes fell again last week and at $197bn a day fell below $200bn for the first time in two months.
COMEX Net Longs
Source: CFTC, Bloomberg
$1.3bn worth of global gold-backed ETF inflows last week mainly coming from the US (+$1.1bn) and Europe (+$131mn). Other regions had minimal flows.
Flows are higher by $1.5bn on the month, led by the US (+$1.3bn) and Asia (+$206mn). European flows are flat.
‘Global Inflows’ refers to the sum of changes of all funds that saw a net increase in ounces held over a given period (eg, month, quarter, etc.). Conversely, ‘global outflows’ aggregates changes from funds that saw ounces held decline over the same period.
Source: Bloomberg; Company Filings; World Gold Council
Gold 3m options skew is the cheapest of all-time at an implied volatility differential of 6 (data going back to 2007). This is being driven by the surge in call implied volatility with minimal moves in put volatility. This means that investors are paying a significant premium for upside exposure in gold which is bullish.
Gold 3m 90/110 skew (positive number represents premium of calls to puts)
Source: Bloomberg
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Chinese jewellery retailers go lower for growth
Ray Jia
Head of Research (Asia Pacific, ex-India) and Deputy Head of Trade Engagement (China) World Gold CouncilIn recent years, expansion into tier three and four cities has been a major strategic focus for many Chinese jewellery retailers. Chow Tai Fook (CFT), a leading retailer based in Hong Kong, added 251 points of sales (POS) in lower tier cities in 2018 compared to only 50 in tier one cities.1 Lao Feng Xiang, another large jeweller with 3,521 POS domestically, also prioritised expansion into lower tier cities.2
While tier one and two cities are better positioned economically, politically and socially, tier three and four cities shouldn’t be disregarded. As shown above, consumers from lower tier cities contributed significantly to the overall sales for CFT in 2018. And other jewellers have told us the same. But what are the key reasons behind this strategic shift into lower tier cities?
Feeling the pressure: still profiting, but at a lower rate
Jewellery retailers’ profit growth has slowed in the past five years. Some retailers have even seen net profits shrinking over the period. Most of them have made efforts to address this: high-margin and innovative products such as 3D-hard gold and “5G” gold have been promoted heavily.3
Product innovations and new market opportunities are essential to all retailers. While there is no shortage of innovation among China’s jewellers, they need to find relatively untapped markets as the competition in tier one and two cities is fierce. Consequently, most jewellers have prioritised plans to expand into lower tier cities. But what do they see in lower tier markets?
Rising consumption potential in lower tier markets
At the July Political Bureau Meeting – a monthly meeting where the president and most senior government ministers determine economic policies – boosting consumption was listed as a vital policy goal. Lower tier cities and rural areas have been the focus as these markets have larger room for consumption growth: disposable income growth rates are higher when compared with higher tier cities.
Faster growing incomes mean an improvement in the quality of life - reflected in the sliding Engel’s Coefficients of these areas.4 As consumers in these cities are spending proportionately less of their incomes on food, they are able to divert more of their disposable income towards other goods such as gold jewellery.
And this seems to be reflected in retail sales data. Lower tier cities’ (tier three and below) proportion in total retail sales in China is rising steadily. In 2017, more than 50% of total retail sales came from lower tier cities.
In lower-tier cities, the average personal income is growing at a faster rate, and more importantly, these consumers are willing to consume.
What do they prefer?
Discussions with the industry indicate that jewellery consumers in lower tier cities are much more traditional than those in big urban centres, preferring high purity products. To them, value preservation outweighs design. But demographic changes could be leading to changes in tastes. And it is increasingly becoming clear that younger generations are at the heart of this change.
Our consumer research in 2016 showed that instead of the traditional 24K gold jewellery, 18K gold jewellery is the popular choice among younger generations.5 The lower entry cost and broader array of designs made 18K gold jewellery more attractive to younger consumers with a desire for enhanced styles.
This year, we will be publishing an update to our consumer research which will allow us to see if consumers’ behaviour has changed further over the last three years and shine a spotlight on the fast-changing tier 3 and 4 cities.
Lower tier cities: driving future growth
Jewellery retailers’ expansion into lower tier cities has been a clear trend in recent years. And efforts to move into these markets have led to rewards. Some retailers have reported higher sales growth in lower tier cities than in tier one and two cities. And this expansion trend is likely to be a long-term phenomenon. With a large consumption potential, lower tier cities’ consumers might soon become the driving force of China’s jewellery demand.
1Data sourced from Chow Tai Fook’s 2019 annual report: https://www.ctfjewellerygroup.com/en/investor-relations/reports.html
2Data and statement from its 2018 annual report: http://pdf.dfcfw.com/pdf/H2_AN201904251322502930_1.pdf
3Please find more detailed information on these products and trends in our Gold Demand Trend reports here: https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2017/jewellery
https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q1-2019/jewellery
4Engel’s Coefficient refers to food consumption’s proportion in a family’s total expenses. The higher the number is, the poorer the family could be and vice versa.
5Please visit https://www.gold.org/goldhub/research/china-jewellery-market-new-perspectives for more information.
Gold: the most effective commodity investment
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilToday, we released a report on gold and commodities, covering key themes including:
Standing apart from the commodities complex, gold is a differentiated asset because it has historically benefited from six key characteristics:
1. Better long-term, risk-adjusted returns than other commodities and broad-based commodity indices.
2. More effective diversification than other commodities, particularly in market downturns, with no meaningful correlation to oil over time.
3. Better performance than other commodities in low inflation periods.
4. Lower volatility than most single commodities and similar volatility to broad-based commodity indices.
5. Proven store of value as commodity values fell sharply against gold following the end of the gold standard.
6. High liquidity.
Ultimately, while commodities can be a relevant tactical asset, a strategic gold allocation of 2%-10% can supplement or replace a broad-based commodities investment alone and may offer more widespread benefits and better risk-adjusted returns.
Gold trading volumes continue to rise
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilLiquidity:
COMEX Net Longs
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF flows:
Price Behavior:
Busy news and economic calendar could drive gold prices this week
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilGold prices:
Potential gold price drivers this week:
Liquidity:
COMEX Net Longs
Source: CFTC, Bloomberg
Gold-backed ETF Flows:
Gold-backed ETF flows last week
Source: Bloomberg, World Gold Council
Options and volatility:
Copyright and other rights
© 2019 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third-party content, including Metals Focus, is the intellectual property of the respective third party and all rights are reserved to them. World Gold Council is affiliated with Metals Focus.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified third-party source, as their source.
World Gold Council does not guarantee the accuracy or completeness of any information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is not a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. We assume no responsibility for updating any forward-looking statements.
Oil price jump highlights gold’s lower volatility
Louise Street
Senior Markets Analyst World Gold CouncilThose familiar with our work will already know that we are unashamedly fans of gold. And for a very good reason we’d argue. While it is without doubt our focus, it would be wrong to say that we analyse it in a vacuum. In our recently published report Gold: the most effective commodity investment, we looked at how gold is under-represented in the commodity indices investors often use to gain exposure. This can have unintended consequences on portfolio performance, especially when other commodities – such as oil – can have significantly different characteristics than gold.
The drone attack in Saudi Arabia on 14th September highlighted this. The event resulted in approximately 5% of global oil supply being taken offline. In response, global oil prices initially spiked by 20% before partially falling back. A major reason for this reaction is that the global supply of oil is concentrated. Looking at data from the US Energy Information Administration, the top 10 oil producing nations accounted for 70% of global oil production in 2018. (Saudi Arabia – the world’s second largest producer – accounted for 12%.) What’s more, half of the list are situated in the Middle East region.
Global gold production, on the other hand, is more geographically diverse. The top 10 producing nations only account for 60% of the global total, with no single producer accounting for more than 12%. And the concentration risk is far lower as gold is mined on every continent except Antarctica. This diversity in mine production helps to create a more stable supply chain, less susceptible to supply shocks. This, in turn, helps to reduce price volatility. Gold has a significantly lower annualised volatility (16%) than oil (32%), and many other key commodities. It’s also worth noting the lack of a consistent relationship between gold and oil prices.1
Questions surrounding this event and rising tension in the Middle East, will only add to the fog of uncertainty, highlighting to investors the need for risk management to protect their wealth. And the rise in uncertainty is likely to benefit gold. In recent editions of Gold Demand Trends, we have written at length of the likelihood that geopolitical uncertainty (in addition to low/negative interest rates and dovish monetary policy commentary by central banks) will drive investment demand higher.
1 Investors also tend to access the oil market via the derivatives which will increase counterparty risk.
Copyright and other rights
© 2019 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third-party content, including Metals Focus, is the intellectual property of the respective third party and all rights are reserved to them. World Gold Council is affiliated with Metals Focus.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified third-party source, as their source.
World Gold Council does not guarantee the accuracy or completeness of any information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is not a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. We assume no responsibility for updating any forward-looking statements.
First Eagle Investment Management on gold’s contribution to an investment portfolio
Thomas Kertsos
Portfolio Manager of the First Eagle Gold Fund First Eagle Investment ManagementFirst Eagle on the outlook for gold
Thomas Kertsos
Portfolio Manager of the First Eagle Gold Fund First Eagle Investment ManagementGold skew is at all-time 'cheapness' highlighting bullish sentiment
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilGold price
COMEX Net Longs
Source: CFTC, Bloomberg
‘Global Inflows’ refers to the sum of changes of all funds that saw a net increase in ounces held over a given period (eg, month, quarter, etc.). Conversely, ‘global outflows’ aggregates changes from funds that saw ounces held decline over the same period.
Source: Bloomberg; Company Filings; World Gold Council
Gold 3m 90/110 skew (positive number represents premium of calls to puts)
Source: Bloomberg