As Economy Tanks, Indonesians Turn to Gold

The Indonesian stock market has plunged nearly 7% this year. The country’s currency, the rupiah, has fallen 9%, and is at its weakest level since the 1998 Asian financial crisis. Bond yield have soared. To weather the storm, Indonesians are buying gold. 

Indonesia ranks as Southeast Asia’s biggest economy, but like many emerging markets, it has suffered capital outflows due to a rallying US dollar and global trade tensions. The country has been hit particularly hard by the emerging market crisis because foreign investors own so much of Indonesia’s government debt – around 40%. The government also runs a deficit, meaning it must continue borrowing money to stay afloat. This makes for a bad dynamic in a world of rising interest rates.

Everyday Indonesians have turned to gold. According to a Reuters report, retail sales of gold have surged. Meanwhile, state miner Aneka Tambang plans to up production of the yellow metal.

Reuters cites a 30-year-old housewife as an example of what’s going on in Indonesia. Santika said she invests in popular gold ingots sold in sizes as small as a gram.

I prefer to buy more gold that I can hold in physical form. I’m afraid if the rupiah will continue to fall this year so I will keep on buying gold.”

According to the World Gold Council, Indonesian gold demand hit a three-year high in the second quarter of this year, rising 10% to 11.2 tons.

Gold serves as a “go-to” investment in Indonesia. Older generations have long held gold jewelry as a safe haven. Younger Indonesians like Santika prefer gold ingots.

A company called Antam produces these ingots. CEO Arie Prabowo Ariotedjo told Reuters the company has seen a big jump in demand over the last few months. Sales surged to 2.2 tons in July and 2.6 tons in August, up from an monthly average of just over 1 ton.

“It looks like the volatile market condition made people switch to gold,” he said.

While the price of gold has fallen in dollar terms, it’s up about 9% in rupiahs this year. That makes the yellow metal an attractive investment for Indonesians, especially considering most Indonesian mutual funds have posted negative returns in 2018.

We’ve seen similar surges in demand for gold in other countries with struggling economies. Turks have been buying gold as that country faces a currency crisis. In Iran, demand for the yellow metal has surged as US economic sanctions loom and the country battles a currency crisis of its own.

When economies go south, people turn to gold as a safe-haven. The yellow metal tends to hold its value, even as stocks, bonds and local currencies crash. The key to weathering a currency crisis, hyperinflation and economic chaos is to be prepared. Once the meltdown happens, it will become much more expensive to buy precious metals. Indonesians today are buying gold at a much higher price now that they are in the midst of a crisis.

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