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Germany’s Budding Love Affair with Gold

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We talk a lot about India’s love affair with gold. The Asian nation ranks as the second largest gold consumer in the world, behind only China. Gold is intimately intertwined with Indian cultural and marriage rights, and it serves as a vital cog in India’s economy,  both above ground and underground.  But the yellow metal has a new lover vying for its attention.

Germany.

Over the last 10 years, gold investment has boomed in Deutschland, according to a report by the World Gold Council. Last year alone, Germans poured €6.8 billion ($8 billion) into gold investment products, with 22% of German investors buying gold over the past 12 months. Over the last 10 years, Germany has established itself as a 100 ton-plus per year market for gold bars and coins. The WGC calls the growth in the German gold market a “radical transformation.”

Before 2008 it was small. Bar and coin demand languished at low levels: average demand between 1995 and 2007 was a modest 17 tons and, in
some years, there were more sellers than buyers … Since then, the German gold investment market has flourished. Germany has established itself as a 100t-plus per year market for bars and coins, and a vibrant domestic ETC market has developed: during Q3 2017, German-listed ETC AUM hit an all-time high of 252.1 tons, equivalent to €9.8 billion.”

So, what drove German investors into the arms of gold?

Primarily it was the long-running financial crisis that kicked off in 2008. That led to extremely loose monetary policy. Germany has been in a negative interest rate environment for several years, and the Bundesbank has done billions in quantitative easing. Two and five-year government bonds have traded at negative yields since 2015.

German investors have an acute awareness of the wealth-eroding effects of financial instability. Hyper-inflation in the 1920s lingers on in the collective memory but, perhaps more importantly, German investors have seen fiat currencies come and go: in the past 100 years, Germany has had eight different currencies. It should come as no surprise that, when faced with such an unsettling economic backdrop, German investors turned to gold – which during our field research one investor described as an enduring currency – to protect their wealth.”

According to the report, 42% of German investors agreed that they trust gold more than national currencies. As one German investor put it, “Gold is still, compared to other investments, the safest investment opportunity because it is economically independent, as it’s accepted worldwide.”

It has also become easier to buy gold in Germany in recent years. Banks were traditionally the primary gold brokers, serving as both wholesalers and retailers. But many banks pulled out of the gold market in the early 2000s. Entrepreneurs stepped in to fill the void. Industry contacts estimate some 100-150 non-bank bullion dealers now operate nationwide.

Gold-backed ETFs have also proliferated over the last decade, providing another opportunity for investors to get into gold.

Since the start of 2016, investment in German-listed gold ETCs has skyrocketed. AUM have more than doubled, growing by 150 tons. At the end of September 2017, total gold holdings were just shy of 250 tons.”

The WGC report offered some interesting insights from its survey of German investors.

  • 59% of respondents agreed with the statement that gold will never lose its value in the long-term
  • 48% agreed with the statement that owning gold makes me feel secure for the long-term
  • 42% agreed with the statement I trust gold more than the currencies of countries

When asked why they invested in gold, 57% of bar and coin investors said it was to protect their wealth and 28% said it was to make good returns in the long-term. It is clear gold fulfills an important long-term, wealth preservation role in German investors’ portfolios. So much so that the amount of gold bought by Germans per person in 2016 was greater than in either of the two gold powerhouses: India and China.”

Germany’s budding love-affair with gold could have broader ramifications in the global gold market, especially if it spreads into other European countries. In an article at Seeking Alpha, analyst Rob Marstrand added a little perspective.

German investment demand has gone from virtually nothing to something very substantial. Mined global gold production is only around 3,000 tons a year. So when one single country suddenly wants an extra 100 to 200 tonnes a year it’s a big deal. If ten countries did at the same time…”

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