The news that the Chinese government has approved two gold-backed ETPs has people speculating on what it means for precious metals. Zhang Bingnan, the secretary general of the China Gold Association, says “Gold ETFs should help boost gold demand as they will make Chinese investments in the bullion much easier.” Many Western analysts think that it will either have no effect, or will decrease physical gold demand. It seems counterintuitive to think that physical demand would drop, since the ETPs are backed by gold.
The best case scenario, which seems quite likely, is that these new investment products will capture some demand that was not taking part in traditional “buy and hold” physical demand, while also grabbing some urban physical demand. I think it is likely that it will add some to physical demand as shares grow, but will take a few years to rival SPDRs gold ETF.