The Japanese Are Dumping Their Gold
Wednesday, May 9, 2012 at 5:23PM In Japan, people who are old enough to have lived it as adults still reminisce about the bubble that blew up in 1989 when the Nikkei almost hit 40,000 (now at 9,045) and when the sky-high prices of real estate could only go up further. The slide from the top to reality today has been brutal, and a lot of people lost their shirts. A home changed from being an “investment” to being an “expense.” Stocks became toys for traders. And government bonds, because they kept their value though their coupons were practically imperceptible, became the place to go, and by golly, there suddenly were a lot of them, a veritable tsunami of JGBs that is still building momentum and will reach by the end of this fiscal year one quadrillion yen ($14 trillion), 240% of GDP. But there has been one investment, especially since 1999, that has worked out phenomenally well for the otherwise hapless Japanese investor: gold.
Alas, they’re dumping it. And when they’re dumping it faster than internal demand can absorb it, the surplus is exported and shows up in the trade statistics of the Ministry of Finance: in fiscal 2006, Japan became a net exporter of gold for the first time since the ministry started tracking it in 1988. Net exports rose every year and built into a crescendo in fiscal 2011, ended March 31, when they surged to 135 tons, an astounding 61% jump from fiscal 2010.
The two largest destinations were Britain and Hong Kong, according to the Ministry of Finance trade data. While Japan has a long history of gold mining, current production is small, ranging from 6.8 tons to 8.9 tons annually over the last decade—hence only a negligible factor in the phenomenon of net exports.
The main sellers were individuals. And one wonders why the love affair with physical gold, one of the few profitable investments the Japanese had access to, is ending despite its truly great run since 1999, when it traded at ¥1,000 per gram, to its peak in August 2011 when it traded at ¥4,745 per gram—the month that bullion house Tanaka Kikinzoku Kogyo K.K. said it bought 15 tons of gold from individuals, five times the normal rate.
There may be reasons that are unique to Japan. Worldwide, the run-up in gold prices might have encouraged individuals to sell their physical gold at an ever quicker pace, but that has not taken place on a massive scale. Rather, a highly plausible reason is that inflation and the fear of inflation have been wrung out of the Japanese psyche over the last 15 years, a period that pundits describe as an infernal descent down the "deflationary spiral":
As the graph shows, the Japanese were in fact among the few people in the world enjoying actual price stability, with interchanging periods of minor inflation and minor deflation—as opposed to the 27% inflation per decade that the Fed has conjured up and continues to call, moronically, “price stability.”
The lack of inflation in Japan has much to do with how expensive everything in Japan used to be during the bubble when Japan was an essentially closed-off market. Over the years, under heavy and consistent pressure from the US, Japan cracked open its borders just a smidgen here and there, allowing cheaper imports to appear, gradually and grudgingly, on the shelves. Read.... The Real Reason for Deflation in Japan.
So, gold has been a great investment, but the Japanese no longer see the need to protect their assets against inflation as its ravages have receded into distant memory. With that fear gone, the motivation to hold on to an asset that has had a phenomenal run turns into the irresistible urge to take profits. But there may be another reason:
"Historically, gold flowed to wealthy countries," said Itsuo Toshima, former Japanese representative at the World Gold Council. And a massive gold outflow, he said, is a sign of Japan's "declining economic power."
In the US, life without Fed-inspired inflation is unimaginable, and investors are struggling with it on a daily basis. “My investing model is ABCD: Anything Bernanke Cannot Destroy: flashlight batteries, canned beans, bottled water, gold, a cabin in the mountains,” said David Stockman in an awesome and pungent interview. The director of the Office of Management and Budget under President Reagan said with his usual flair that a "paralyzed" Fed is in its "final days," hostage of Wall Street "robots" that trade in markets that are "artificially medicated." Read the whole interview..... The Emperor is Naked: David Stockman.
Reader Comments (16)
This seems a stretch to me. Consider that Japan had 2 absolutely unmitigated disasters last year and is verging on yet another one with the crumbling Fukushima nuclear power plant. It seems to me that because of the earthquake and tsunami in that country in 2011, massive amounts of money are needed to dig out and rebuild significant parts of the country. While government may well provide some of this, individuals and businesses will likely supply the bulk of it. What then should someone sell to rebuild or replace a damaged home or business? Equities that have not advanced in price for years or gold that has been wildly profitable? Unless one sells a profitable investment, there is no profit to enjoy. It remains unrealized on paper unless it is sold. Selling gold may very well be the only way that many Japanese can raise the money they so desperately need.
1. People take profits on assets that have increased in price
2. People are doing it tough with falling income, increasing costs, and other asset prices falling as well
The movement in the Yen versus the Dollar is unreal and the Yen is wildly over valued. IMO the value of the Yen right now should be around the 100 yen per US dollar level and based on the poor economic situation in Japan the real value would be about 125 yen per US dollar or more.
many people did dump their gold. but i am betting there is a lot more here. the economy has slowed down a lot and the Japanese are printing like mad here, and soon the taxes will go up I believe to 15% for sales tax it is now 5%. so the worst is yet to come. deflation is the mind set here when i talk of inflation people either look at me like whats that? or laugh. I hope Im not on the wrong boat cause I have been buying for the last few years.and everyone else is selling.
Lee - I'm with you. I would like to add that Japanese individuals and institutions hold 95% of the $14 trillion in JGBs, and they also have trillions in the bank. So, they're wealthy, if JGBs and bank deposits retain their value. It's the government that's utterly impoverished and indebted, and so the question remains open as to how long JGBs can retain their value....
Japan is finally hitting the wall. The predictions (decades old) of Japan running into trouble are coming true. There is no more free cash to give to the government anymore - old Japanese citizens are selling their bonds to pay for expenses. This is likely to work out OK in a relative sense for Japan because they owe the debt to their own citizens but it will still suck for those who have saved for their retirement. The odds that they will be asked to "sacrifice" for their nation is 100%.
http://www.customs.go.jp/toukei/info/index_e.htm
From Harvey Organ's commentary:
"........but more importantly as of hours ago, in a truly historic move, "Okayama Metal & Machinery has become the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies." Not our words: the FT's.
More:
Initially, the fund aims to keep about 1.5 per cent of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to "escape sovereign risk".
The move into a non-yielding asset comes as funds in the world’s second-biggest pension market are under increasing pressure to meet promised payments, as domestic interest rates remain rooted near zero. This year, the first of Japan’s baby boomers turn 65, becoming eligible for payouts.
Mr Kiguchi said the lack of yield was a concern for the fund’s investment committee, but he persuaded them that "from a very long-term point of view, gold may be one of the safe currencies". He added that he had sold Australian dollars this month to meet his initial target allocation for gold for the fund, which has 20,000 members.
Mizuho Trust & Banking, a unit of Mizuho Financial Group, has begun to offer investment schemes allowing smaller pension funds to invest in gold.
While few fund managers are counting on a crash in core assets such as Japanese government bonds, said Takahiro Morita, head of the Tokyo arm of the World Gold Council, a producers’ association, they were increasingly receptive to the idea that gold could act as a buffer against shocks. "Last year’s tsunami and the eurozone debt crisis shows that it was wise to expect the unexpected," he said.
The first of many:
Historically, institutions in the $3.4tn Japanese pension market have clung to traditional assets. Bonds accounted for 59 per cent of industry assets in 2011, the highest share in the world, according to Towers Watson, a consultant. Just 6 per cent – the lowest share – was invested in alternatives such as property, private equity and hedge funds.
Nomura, Japan’s biggest wealth manager, added a gold option to its monthly survey of 1,000 randomly selected retail investors in February. Every month since, gold has been ranked the third-most desirable addition to portfolios, well ahead of competing assets such as investment trusts, bonds or foreign securities.
And the absolute punchline:
With institutions warming to gold, too, demand could grow further. "If you look at assets over the past couple of decades, equity has been a loser, while fixed income offers tiny coupons," said Yoshio Kuno, Japan head of Newedge, the futures broker. "Gold is becoming an acceptable currency substitute."
http://harveyorgan.blogspot.com.au/
Much has been written about that J-pension fund adding gold to its portfolio. Everyone is worried about JGBs and the yen (though they've been extremely strong), and they're grappling with other options. I can see the pension fund's logic. If the yen or JGBs suddenly collapsed (very unlikely), this bet would be a huge plus. If not, well....
Buying and storing gold is a luxury for those who don't need cash anytime soon.