The Germans: Now the world’s biggest gold buyers

By Frank Holmes – CEO and Chief Investment Officer, U.S. Global Investors

Germans Have Quietly Become the World’s Biggest Buyers of Gold

When I talk about Indians’ well-known affinity for gold, I tend to focus on Diwali and the wedding season late in the year. Giving gifts of beautiful gold jewelry during these festivals is considered auspicious in India, and historically we’ve been able to count on prices being supported by increased demand.

Another holiday that triggers gold’s Love Trade is Dussehra, which fell on September 30 this year. Thanks to Dussehra, India’s gold imports rose an incredible 31 percent in September compared to the same month last year, according to GFMS data. The country brought in 48 metric tons, equivalent to $2 billion at today’s prices.

As I’ve shared with you many times before, Indians have long valued gold not only for its beauty and durability but also as financial security. Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 metric tons. That figure surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

 

A New Global Leader in Gold Investing?

But as attracted to gold as Indians are, they weren’t the world’s biggest investors in the yellow metal last year, and neither were the Chinese. According to a new report from the World Gold Council (WGC)that title shifted hands to Germany in 2016, with investors there ploughing as much as $8 billion into gold coins, bars and exchange-traded commodities (ETCs). This set a new annual record for the European country.

Gold investment demand in Germany Hit a New High in 2016
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Germany’s rise to become the world leader in gold investing is a compelling story that’s quietly been developing for the past 10 years. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed ETC didn’t even appear on the market until 2007.

But then the financial crisis struck, setting off a series of events that ultimately pushed many Germans into seeking a more reliable store of value.

“While the world fretted about Lehman Brothers, German investors worried about the state of their own banking system,” the WGC writes. “Landesbanks, the previously stable banking partners of corporate Germany, looked wobbly. People feared for their savings.”

To stanch the bleeding, the European Central Bank (ECB) slashed interest rates. Banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.

All of this had the effect of rekindling German investors’ interest in gold. As I’ve explained before, gold prices have historically surged in that country’s currency when real government bond yields turned subzero. What we saw in Germany was no exception.

gold price jumped when German government bond yield turned negative
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Weakening Faith in Paper

As the WGC points out, Germans are acutely aware that fiat currencies can become unstable and lose massive amounts of value. In the 1920s, the German mark dipped so low, a wheelbarrow overflowing with marks wasn’t enough to buy a single loaf of bread. In the past 100 years, the country has gone through eight separate currencies.

It’s little wonder, then, that a 2016 survey found that 42 percent of Germans trust gold more than they do traditional money.

This is where Germans and Indians agree. The latter group’s faith in the banking system has similarly been eroded over the years by regime changes and corruption, and gold has been seen as real money.

It’s not just individual German investors who harbor a strong faith in gold. The Deutsche Bundesbank, Germany’s central bank, spent the past four years repatriating 674 metric tons of Cold War-era gold from New York and Paris. The operation, one of the largest and most expensive of its kind, concluded in August. Today the central bank has the second largest gold reserves in the world, following the U.S. Federal Reserve.

Room for Further Growth

With Germans’ demand for gold investment products having already reached epic proportions, what can we expect next? Will interest continue to grow, or will it recede?

Analysts with the WGC believe there is room for further growth, citing a survey that shows latent demand in Germany holding strong. Impressively, 59 percent agreed that “gold will never lose its value in the long-term.” That’s a huge number.

Regardless of whether or not investment expands in Germany, this episode shows that gold is still seen as an exceptional store of value, and trusted even more so than traditional fiat money. For gold investors, that’s good news going forward.

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German Gold repatriation picks up, but still at slow pace

Mark O’Byrne’s Goldcore.com comments that although Germany’s repatriation of its gold from the U.S. and France picked up a little in 2014, and is on schedule according to the Bundesbank, it is still being undertaken at a very slow rate given the The Netherlands managed to repatriate  122 tonnes of the their gold reserves from New York, secretly and at apparently very short notice,  to Amsterdam in 2014.  To read this article on Goldcore, and other fascinating ones on the Goldcore blog, click here.

goldcore_bloomberg_chart1_19-01-15

“The Bundesbank successfully continued and further stepped up its transfers of gold,” the central bank said in a statement. “Implementation of our new gold storage plan is proceeding smoothly. Operations are running very much according to schedule,” said Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank.

“We also called on the expertise of the Bank for International Settlements for the spot checks that had to be carried out. As expected, there were no irregularities,” Thiele said.

Germany’s gold reserves are the second biggest in the world after those of the United States. The World Gold Council’s latest data shows Germany’s gold reserves at 3,384.2 tonnes today.

The Bundesbank also helpfully provided tables in its press release, presumably in an attempt to create further transparency and understanding of the issue which remains an important one to large sections of the German political and financial class and the public who are concerned about a new Eurozone debt crisis and the fate of the euro.

goldcore_bloomberg_chart2_19-01-15

According to the German central bank’s own data, 1,447 tonnes are stored at the Federal Reserve Bank in New York, 438 tonnes at the Bank of England in London and 307 tonnes at the Banque de France in Paris.

Since the transfers began in 2013, the Bundesbank said it has relocated a total of 157 tonnes of gold to Frankfurt – 67 tonnes from Paris and 90 tonnes from New York.

goldcore_bloomberg_chart3_19-01-15

“In 2014, 120 tonnes of gold were transferred to Frankfurt from storage locations abroad: 35 tonnes from Paris and 85 tonnes from New York,” according to the statement.

This suggests that the Bundesbank continues to struggle to get its gold reserves back from the New York Federal Reserve.

It is important to remember that out of nowhere, the Netherlands secretly repatriated 122 tonnes of the their gold reserves from New York to Amsterdam in 2014.

Since World War II and Germany’s defeat in that war and during the Cold War, Germany’s gold holdings have been kept in the vaults of other central banks – the Banque de France, the Bank of England and the New York Federal Reserve.

Since the global debt crisis and indeed the U.S. and Eurozone debt crisis, there have been grassroots movements for central banks to repatriate their gold to home soil – in order to ensure that it can be used a a reserve asset in the event of a monetary crisis.

Germany expects to have repatriated half of it’s gold reserves for storage in Frankfurt by 2020. Today’s announcement suggests that 23% of the total reserves to be returned to Germany has been delivered.

In its statement  the Bundesbank is at great pains to emphasise the authentic nature of the transfer.

“The Bundesbank assures the identity and authenticity of German gold reserves throughout the transfer process – from when they are removed from warehouses abroad until they are stored in Frankfurt am Main.”

“As soon as the gold was removed from the warehouse locations abroad, Bundesbank employees cross-checked the lists of bars belonging to the Bundesbank against the information on the bars removed. Finally, once they arrived in Frankfurt am Main, all the transferred gold bars were thoroughly and exhaustively inspected and verified by the Bundesbank.”

“When all the inspections had been concluded, no irregularities came to light with regard to the authenticity, fineness and weight of the bars.”

However, a curious element to the statement will likely trigger some speculation among those familiar with the gold market. “The Bundesbank took advantage of the transfer from New York to have roughly 50 tonnes of gold melted down and recast according to the London Good Delivery standard, today’s internationally recognised standard.”

Long time observers will note that Germany’s initial request for it’s gold from New York was declined. They were then denied the opportunity to even view their own gold on grounds of “security.”

 This led to speculation that the Federal Reserve – who have not had a public audit of gold stocks since 1953 – did not have the gold reserves it was supposed to be custodian of. The immediate melting down of fifty tonnes of gold before it could be publicly audited in Germany will not alleviate these suspicions.

From a wider perspective this story reaffirms the fact that central banks today, the monetary masters of the fiat currencies we use, still view gold as a vital safe haven monetary asset and reserve currency. It also indicates a lack of trust between central banks, a trust which seems to have been further undermined by the chaos created by the apparent unilateral move by Switzerland’s SNB last week.

 We remind our customers to take the advice of Dr. Marc Faber by becoming their own central bank. Now, more than ever, it is essential to own gold in allocated, segregated accounts in safest vaults in the world, in the safest jurisdictions in the world.

We believe that other central banks may have already quietly sought or indeed will seek repatriation of their gold from London and New York. This has the potential to create the long awaited short squeeze as central banks are forced to enter the market to acquire the physical bullion that they thought they already owned.

We believe, like the Dutch and the Germans, that only gold bullion in your possession or allocated gold stored in secure locations such as Singapore, Hong Kong and Zurich can be viewed as a safe-haven asset.