The Japanese Are Dumping Their Gold

Wolf Richter

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 already 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 a descent down an infernal "deflationary spiral":



As the graph shows, over the last fifteen years, 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.