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Guest Post: As The Euro Tumbles, Spaniards Look To Gold

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Submitted by J. Luis Martin, director of Truman Factor, This article originally appeared in Peter Schiff’s “Gold Letter"

As The Euro Tumbles, Spaniards Look To Gold

The unremitting deterioration of the eurozone’s sovereign debt landscape continues to fuel uncertainties about the longevity of the euro as a hard currency. Such uncertainties are not only leading to capital flight from the EMU’s periphery to the core and destabilizing markets worldwide, but they are also beginning to frighten southern European savers into seeking refuge outside their 10-year-old currency.

Such is the case of Spain – the latest tumbling economy to threaten the euro’s survival. As the crisis deepens, there is still a window of opportunity for Spaniards to turn to gold as a means to protect their wealth against the risks of increased foreign exchange volatility, forced re-denomination, or even a total currency collapse.

Spain: Too Big to Ignore

While the general consensus among analysts is that the common currency may withstand (and even desire) Greece’s exit from the euro system, Spain is both “too big to fail” and “too big to rescue.”

Indeed, as the crisis finally hits Spain, the eurozone’s fourth-largest economy, the country has witnessed the flight of €315bn ($396bn) worth of foreign capital in the past year – the equivalent of 22% of its GDP. Of this amount, €220bn ($277bn) vanished during the first six months of 2012. And in just-released numbers from the European Central Bank (ECB), private sector deposits at Spanish banks fell almost 5% in July (the biggest drop since the ECB began to record this data in 1997).

Brussels’ inability to stop Spain (and potentially Italy) from spinning into an uncontrollable solvency crisis has spurred fear over a potential disintegration of the euro system.

Others warn, however, that signs of economic stagnation spreading to the core, along with rising political and social tensions across the continent, may be conducive to an equally wealth-destructing picture: the desperate adoption of expansionary monetary and debt mutualization policies long prescribed by officials in Brussels to “save the euro.” In fact, ECB President Mario Draghi just promised as much in his latest remarks on Thursday.

Naturally, either of these scenarios will severely punish creditors and savers in euro-denominated assets.

From Cement Bricks to Gold Bars?

For years, Spaniards have trusted home ownership as a safe and profitable savings channel. Up until the late 1990s, “investing in bricks,” as the Spanish call it, was a relatively easy and affordable wealth accumulation strategy (according to the government, 83% of Spaniards are homeowners). The coupling of Spaniards’ blind faith in ever-rising real estate values with the artificially low interest rates that came with the euro – as well as a financial system plagued by politicians recklessly managing savings banks – conjured up a massive housing bubble.

Since Spain’s entry into the euro system, the country has experienced such economic myopia that in the spring of 2007, Pedro Solbes, the then Socialist government’s Minister of Finance, revealed the sale of a large portion of the country’s gold. At the time, Minister Solbes argued that the precious metal “was no longer profitable,” and that the proceeds from the sale would be “reinvested in sounder assets,” such as Spanish sovereign debt. That year, Spain sold 157.8 tons of gold (32% of the national reserves) at an average $630 an ounce. Spain has lost over $5bn of appreciation in the intervening years.

As the real estate bubble burst, and as Spaniards watched with astonishment the dire economic developments in Ireland, Portugal, and Greece, the prospect that an era of prosperity (albeit artificial) had come to a sudden end began to finally sink in.

This past May was a turning point for Spain, when BFA-Bankia, the country’s fourth-largest bank, became de facto nationalized. Foreign capital flight spiked (€41.3bn left the country in May, and €56.6bn in June) and small depositors noticeably started to look for ways to protect their savings.

Following Bankia’s debacle, Spain’s Budget Minister Cristóbal Montoro was quick to address the media in an attempt to calm the public. Montoro said that a “corralito,” or bank holiday, was a technical impossibility in Spain due to the country’s membership in the euro system, and that all bank deposits were safe. The damage, however, had already been done – evidence of a failed financial system demanding billions of foreign aid to fill its holes and the possibility of Spain following Greece’s path to economic meltdown had become too evident to conceal.

The sale of safe deposit boxes has since surged and mainstream media have begun to run stories on how to legally open accounts in foreign currencies abroad to protect savings.

Furthermore, since the ongoing “financial sector restructuring” is far from over and an estimated 2 million homes remain empty, the value of the real estate Spaniards possess continues to decline.

So, Spaniards are now seeing the value of their cherished “bricks” plummeting, the government keeps on raising taxes, and the future of their paper money – and even its mere existence – is anything but guaranteed.

Under the current environment, gold may turn out to be the Spaniards’ best hedge.

The Gold Market in Spain

According to Marion Mueller, vice president of the Spanish Precious Metals Association (Asociación Española de Metales Preciosos, or AEMP) and founder of Oro y Finanzas, an online publication which specializes in gold and finance, Spaniards’ interest in gold is experiencing a noticeable boost.

“Up until very recently, to speak about gold as an investment or as wealth protection insurance was grin-provoking. That is changing,” says Mueller.

She notes that since 2010, when the Spanish economic downturn became inescapable, a growing tendency to invest in physical gold developed among Spanish investors, brokers, and financial institutions. Demand for physical gold from the general public is also growing, but Spaniards are not yet as educated about the market as northern Europeans. “There is still confusion and lack of information about gold as a way to protect one’s purchasing power,” she explains, “and our goal at the AEMP and at Oro y Finanzas is precisely to try to inform people about gold.”

 

Cash-for-gold sign walkers in Madrid (photo: Luis Hernando)

Evidence of the growing demand for investment gold is also found in the rapid proliferation of cash-for-gold shops in Spain. This particular market responds to a different side of the crisis, as it caters to people who need to sell their jewelry to pay debts or make ends meet. However, in terms of its relationship with the upswing in bullion demand, scrap gold is not going back to the jewelry sector. Instead, Mueller explains, “100% of it is going back to feed the international gold bullion industry in places such as England, Switzerland, and Belgium.”

As per a European directive, gold bullion in Spain enjoys a favorable tax treatment, as the investment-grade metal is exempt from Value Added Tax (VAT). In addition, in Spain, there are no special taxes or levies specific to the resale of gold bullion. There is thus great potential for gold (and silver) to become a money substitute among the population.

According to Mueller, Spain’s increasing demand for physical gold has led to the emergence of specialized dealers in Spain. Not only are Spanish precious metals distributors sprouting, but well-known French and German dealers are beginning to offer bullion in Spain.

While access to physical gold in Spain is becoming easier and more widespread, “things might change,” warns Mueller.

“The rise in gold prices is a reflection not of the crisis, but rather of the end of a monetary cycle,” Mueller emphasizes. In her view, the current debacle in Europe may turn governments to intervene in the gold market. “We live in a period of maximum government control… you can rest assured that, if [the government] decides to intervene, it will.”

Owning physical gold now, Mueller says, “remains the best protection against wealth confiscation.”

Because the next several months may prove critical to the future of the euro system, the ECB has charted a course for devaluation. This may continue to buy the eurozone additional time before its endgame finally plays out, but any number of factors could still split the common currency. Either way, this is a critical window of opportunity for Spaniards to learn how to protect their wealth with gold.

 

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Mon, 09/10/2012 - 09:37 | 2778116 GetZeeGold
GetZeeGold's picture

 

 

Hey....the end of the line is back there Pepe.

Mon, 09/10/2012 - 10:00 | 2778181 saturn
saturn's picture

Get zee gold, then visit http://rt.com/news/gambling-casino-tychoon-madrid-779/ to transfer it in the right hands.

Mon, 09/10/2012 - 10:06 | 2778189 GetZeeGold
GetZeeGold's picture

 

 

That's freakin genius there.....build a casino where no one has any money to gamble.

 

Mon, 09/10/2012 - 10:03 | 2778190 SheepRevolution
SheepRevolution's picture

How do you say "Bank run, bitchez!" in spanish?

Mon, 09/10/2012 - 10:17 | 2778231 SilverNoob
SilverNoob's picture

Panico bancario, putos!

Mon, 09/10/2012 - 10:33 | 2778300 GetZeeGold
GetZeeGold's picture

 

 

Ask a question......get an answer.

 

Mon, 09/10/2012 - 13:15 | 2778911 Colonel Klink
Colonel Klink's picture

+1

Love it, literal translation: Bank panic!

He who panics first gets their money.

BTW, love the avatar.  While you're down there diving, see if you can find all my PMs I lost in that accident.

Mon, 09/10/2012 - 10:46 | 2778338 Never One Roach
Never One Roach's picture

 

"Compramos Oro"

En Top Dollar 4 Gold compramos oro...

 


Mon, 09/10/2012 - 09:38 | 2778120 PhD
PhD's picture

Financial services Minister commited suicide today, must have been an overdose recovery

Police suspect Financial Services Minister Matsushita (73) committed suicide. Told FSA earlier today he wdn't be showing up for work - Kyodo

https://twitter.com/HirokoTabuchi/status/245093279367045120

Mon, 09/10/2012 - 09:42 | 2778131 ParkAveFlasher
ParkAveFlasher's picture

What's Spanish for seppuku?

Mon, 09/10/2012 - 10:18 | 2778238 SilverNoob
SilverNoob's picture

El harakiri, amigo.

Mon, 09/10/2012 - 09:51 | 2778156 adr
adr's picture

When forced to actually say no, the Japanese would rather kill themselves. There is no worse crime in Japan than actually admitting failure.

Mon, 09/10/2012 - 12:59 | 2778857 mickeyman
Mon, 09/10/2012 - 09:37 | 2778121 valkir
valkir's picture

Oro perras

Mon, 09/10/2012 - 13:01 | 2778864 SemperFord
SemperFord's picture

You mean, "Oro putas"

Mon, 09/10/2012 - 09:38 | 2778122 LarryDavis
LarryDavis's picture

Spain has a very well run and efficient bureaucracy with politicians looking to make sensible and logical choices to ensure the next generation has the same opportunity as their predecessors.

Mon, 09/10/2012 - 09:39 | 2778127 GetZeeGold
GetZeeGold's picture

 

 

....and they're green with almost zero unemployment.

 

We should do that here!

 

Mon, 09/10/2012 - 09:46 | 2778138 gggunchi
gggunchi's picture

Not sure if serious...

Mon, 09/10/2012 - 09:49 | 2778145 GetZeeGold
GetZeeGold's picture

 

 

Give him the benefit of the doubt dude.

 

Mon, 09/10/2012 - 09:51 | 2778157 gggunchi
gggunchi's picture

Well, I mean, if he is serious I'd love to know where in Spain he has been?  Last time I was in Spain you have to hurry up and wait . . . all the time. 

 

Public services opened and closed, pretty much at will, and hungry at 4 PM?  Screwed.  Everything is closed, and most banks and or public servies close at 3PM. 

 

So I'll give him the benefit of the doubt and assume he was being sarcastic.

Mon, 09/10/2012 - 09:56 | 2778167 GetZeeGold
GetZeeGold's picture

 

 

So I'll give him the benefit of the doubt and assume he was being sarcastic.

 

OK......locked in.

 

Mon, 09/10/2012 - 09:38 | 2778126 ParkAveFlasher
ParkAveFlasher's picture

Oro, hembraz!

Mon, 09/10/2012 - 09:44 | 2778135 PaperBear
PaperBear's picture

Some other chump had sold part of a nation’s gold reserves, it wasn’t just Gordon Brown.

Mon, 09/10/2012 - 09:51 | 2778153 GetZeeGold
GetZeeGold's picture

 

 

The good thing about Engish gold is.....it's cheap!

 

It's also gone....it was a one time sale.

 

Mon, 09/10/2012 - 09:58 | 2778176 ParkAveFlasher
ParkAveFlasher's picture

It's also invisible and massless, which makes all those pesky storage problems a minty-cool vaporous breeze.

Mon, 09/10/2012 - 10:08 | 2778199 GetZeeGold
GetZeeGold's picture

 

 

I just throw it in my sock drawer....am I doing it wrong?

 

Mon, 09/10/2012 - 10:51 | 2778365 ParkAveFlasher
ParkAveFlasher's picture

Whatever gets you through the night, it's alright.  It's alright.

 

Mon, 09/10/2012 - 12:38 | 2778775 A Nanny Moose
A Nanny Moose's picture

If you put it inside a sock, it makes a handy bludgeon.....just saying.

Mon, 09/10/2012 - 12:59 | 2778852 ParkAveFlasher
ParkAveFlasher's picture

...and you could always booby-trap the sock One-Eyed Willy style, if you know what I mean ...

Mon, 09/10/2012 - 19:56 | 2780283 A Nanny Moose
A Nanny Moose's picture

I am so glad I've trained myself to not have beer in my mouth while reading ZH comments. My keyboards last longer now.

I suppose I am failing in my patriotic duty to go out and consume.

Mon, 09/10/2012 - 12:24 | 2778724 spentCartridge
spentCartridge's picture

If you guys actually believe the myth that bungle Brown sold Uk gold back in the day then ... well?

 

I'm willing to wager all my gold that not a single atom of that stash actually moved from one location to the next, physically.

 

It's still all in the same hole, and it always will be.

 

Paper pushing games by criminal .Gov.

 

The real gold is still in the same place as it ever was, and it's gonna stay there too.

Mon, 09/10/2012 - 09:49 | 2778147 adr
adr's picture

ahh the old, your home will continue to double in value every five years, meme.

How anyone could believe home values could increase at that rate without corresponding hyperinflation is beyond me.

Early in the housing bubble I'd ask people,"so your house will be worth $1 milion by 2014." They would say, "That's what the realtors say. I'll be rich." I'd reply with, "You think you could afford to buy a $1 million house with what you make?" The answer always seemed to be, "Of course not, but I can just sell my house, and then have the money to buy another house."

After the last ten years I don't think the red palm marks will ever come off my face.

Mon, 09/10/2012 - 10:49 | 2778356 Never One Roach
Never One Roach's picture

The only way old houses will increase in value is by placing gold bars (or platinum, silver, etc) in the walls.

 

Good luck!

Mon, 09/10/2012 - 09:51 | 2778154 americanspirit
americanspirit's picture

Not chump - traitor

Mon, 09/10/2012 - 09:51 | 2778155 Tom Green Swedish
Tom Green Swedish's picture

Thought I saw an post here a week or two ago (I never read the articles anymore) about Spainards selling their gold to eat?

Mon, 09/10/2012 - 09:53 | 2778162 AG BCN
AG BCN's picture

I just received some nice Johnson Matthey silver bars in the post this morning, I live in Barcelona but it's easier to get them from Switzerland buying in small amounts for each delivery and getting the seller to write a 50 Euro nominal value on the packet to reduce the chance of red flags with customs. Buying in Spain is difficult, even the coin shops are now asking 45 Euros for a Silver Eagle compared to a modest 21 Euros a couple of years ago. Gold is more in line with the rest of Europe but priced in Euros it is almost at it's all time high. 

Mon, 09/10/2012 - 10:10 | 2778201 savagegoose
Mon, 09/10/2012 - 10:22 | 2778262 Anasteus
Anasteus's picture

I thing there could be a natural and gradual way of establishing a gold standard bottom-up by spreading more and more shops, both standard and internet-based, offering products (also) at gold-ounce denominated prices. The first remarkable difference would be the price stability over time. As far as I know there are a few such projects already running; I think Utah accepts gold coins as legitimate money. The fiat and sound currencies would thus compete for a longer while in parallel until people decide on their own which one will eventually prevail. This may sound like a scifi these days but sooner or later it may become of more significant importance.

Mon, 09/10/2012 - 10:30 | 2778290 Dareconomics
Dareconomics's picture

Spain is in much worse shape than the mainstream media is reporting. It has to sell at least €90bn in debt to finance its budget deficit and maturing debt by the end of the year:

http://dareconomics.wordpress.com/2012/09/06/actual-spanish-financing-ne...

http://dareconomics.wordpress.com/2012/09/08/actual-spanish-financing-ne...

Mon, 09/10/2012 - 12:17 | 2778685 falak pema
falak pema's picture

euro tumble ?

Wish my friend in Geneva could hear that. Last time I looked it was at 1.2797 USD/Euro. 

EUro tumble as defined by my trader friend is Eur/USD = 1.15!  by September 15, aka post Karlsruhe! 

We shall go through some tuff months on Karlsroad,  Spain and Greece issues in Eurozone. But so will the USa unless we get QE-3!! 

Draghi has the Germans firmly by their Nuts by the looks of it!

Sterilize me, sing those nuts! 

I remember a US General in WW2 who said to the PAnzer commander in Bulge battle at Bastogne, when the guy said "give up!" : NUTS!  Was his reply! 

We all like nuts. I hope my other half does. I'm making nut cracking fudge. Nothing to write home about; everything to cry home run about! 

 

 

Mon, 09/10/2012 - 12:25 | 2778733 Freegold
Freegold's picture

"the end of a monetary cycle" So very true, we are there soon. Get your chair b4 the music stops :)

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