Friday, March 29, 2024
 
Columnist
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"Approximately 59 tonnes of gold bars and coins were sold to retail investors in Germany during the first quarter of this year. These gold sales exceeded the same-period level of the previous year four times."

Golden German lessons
20/07/2009


Approximately 59 tonnes of gold bars and coins were sold to retail investors in Germany during the first quarter of this year. These gold sales exceeded the same-period level of the previous year four times.

For whatever reason, the Germans lately hold the absolute leadership when it comes to purchasing gold bullion.

For comparison, the French bought only 1.1 tonnes of gold during the same period.

On the back of such solid demand for gold investment, fully automatic gold vending machines, the size of a phonebooth and shaped as a gold bar, have even been set up recently in German railway stations.

So, with German citizens suddenly buying about 55 times more gold than the citizens of their direct neighbor and second largest economy in Europe, France, we should probably wonder, whether (A) the Germans have gone crazy or (B) they may know something that others don't.

It turns out that Germans are simply buying gold because they aim to rescue their savings by converting funds on their bank accounts to gold bars, after it has been admitted by the German banking regulator BaFin that the country's financial system was only minutes away from total collapse last autumn.

More recently, the German finance minister announced that the country would record its biggest post-war budget deficit this year as the economic crisis is sending tax revenues plummeting ¡V with no improvement in sight.

In fact, the Germans are scared not only about their own governments' ballooning budget deficit, but also about those of other euro zone members too.

Germany may well be asked to bail out a bankrupt Ireland, Greece, Spain, Portugal, Italy and France. (Yes, France is bankrupt too, according to the country's premier Francois Fillon who stated back in October, 2007: "The truth is that I am the head of a state that is in a state of bankruptcy.'')

And then, Germany may be asked to bail out Eastern Europe too, not least to save euro zone member Austria, which has an exposure of 70 percent of its GDP to the collapsing region.

What unsustainable national debt and budget deficits ¡V like the ones we are seeing now in a number of European countries as well as the United States ¡V can lead to in a worst case scenario, was actually classically experienced before in form of hyperinflation by one major Western European country in 1919-1924, and this country was Germany.

Very possibly, this may be the reason then why the Germans are piling up on gold now, as they are starting to expect a possible repeat of history.

Fortunately, Hong Kong and China do have a very low national debt, which is one of the reasons why it looks unlikely that such a fate would meet us around here.

But, the danger of rising inflation, perhaps very rapidly rising inflation globally is still very real as inflation can be imported from the less healthy economies to the healthy ones, such as via competitive currency devaluations.

So, following the German example, and having a good exposure to precious metals in an investment portfolio should be a must for financial crisis and inflation protection, even for Hong Kong investors.

After all, the Hong Kong dollar is still linked directly to the greenback for now.

When piling up one's crisis nest egg accordingly, it should be considered to complement positions in gold with other precious metals, especially silver.

Silver, although more volatile than gold, is considered by many analysts to be the most greatly undervalued metal of all.

Next to being a crisis safe haven, it also has vastly varied uses in many promising growth industries.

Mind you though, there is 78 times more "paper-gold'' being held by investors than physical gold in existence on this planet that has ever been mined, according to the World Gold Council. (A similar number is considered likely to apply for silver too).

Therefore, investors should stay clear of buying paper-metal accounts from banks which typically are not backed by any physical metal at all and are therefore subject to default risk. Instead, one should make sure that any precious metals investment vehicle used does actually store the metals in a fully unencumbered, "uneased'' and physical form.

 


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Golden time to load up - 04/03/2013
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Games of distraction - 03/12/2012
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