- German gold demand surges from 17 ton-a-year to a 100 ton-plus per year
- €6.8 Bln spent on German gold investment products in 2016, more per person than India and China
- Germans turned to gold during financial crises and ongoing euro debasement
- Evidence of latent retail demand on increased economic concerns
- "Gold fulfils an important long-term, wealth preservation role in German investors’ portfolios"
Editor: Mark O'Byrne
India and China often grab the headlines as the world's largest buyers of gold. In 2016 this was not the case.
When measured on a per capita basis it is Germany that takes the impressive crown of largest gold buyer in 2016, all thanks to their investment market. Last year the country set a new personal best, ploughing as much as £6.8bn ($8 bn) into gold coins, bars and exchange-traded commodities (ETCs).
This is impressive considering that back in 2008 the amount of gold purchased by Germans barely registered outside of the country. A new World Gold Council report records that 'average demand between 1995 and 2007 was a modest 17 tonnes'. In some of those years they weren't even net-buyers.
In 2008 this began to change as 'the global financial crisis brought gold to the attention of German investors at large.' By 2009, the German gold investment market became one of the world's largest, with annual coin and bar demand growing four-fold from 36t in 2007 to 134t in 2009.
Since then it has continued to climb, as explained in the latest World Gold Council report:
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 252.1t, equivalent to €9.8bn.
So what changed and can the country keep up this record-breaking?
It is assumed that the Germans have an innate understanding of the value of gold thanks to their tumultuous economic history.
As the WGC summarises:
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.
The past seemed to be catching up with the future following the financial crisis when savers once again began to see their savings disappear. Following the ECB's decision to slash interest rates German banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.
It isn't surprising that that this triggered Germany's gold shopping spree. This was supported by the country's growing gold bullion network that has made it easier for customers to buy and store gold bullion and coins.
Their concerns about the banking system drove up demand for the physical, allocated gold products of the 100-150 non-bank bullion dealers across the country. Investor behaviour shows that gold buyers are clearly seeking out physical gold that they can take delivery of should they so wish.
Where does it go from here?
'...it is clear why the market boomed. Financial and economic crises brought gold to the attention of investors, and the resulting interest triggered a wave of product innovation and market development.'
Given the upshot in German demand following the financial crisis of 2008, it is understandable to look out for further economic downturns as an indication of future gold demand in Germany.
Bank of America Merrill Lynch Fund Manager Surveys, for example, highlight that European investors see FED/ECB policy mistakes as the most likely tail-risk event in the coming months, and around 30% of those surveyed believe Fed balance sheet reduction will be a risk-off event, causing a fall in both global bond and stock prices.
So does this mean demand for gold in Europe's wealthiest country is set to increase? Perhaps, but it isn't reliant on more financial upset. The WGC notes that 'it is important to highlight that Germany’s gold market is not dependent on financial and economic crises.'
In the last decade the economy has performed relatively well in contrast to its fellow EU members. Unemployment is very low and wage growth at 4.4% this year is impressive when compared to the likes of the UK. Germans also remain positive about their own personal financial situations.
This suggests that Germans are not buying gold simply because they believe a financial crisis will happen but because they see it as an important portfolio diversifier which acts as a store of value.
In 2016, the WGC commissioned Kantar TNS to survey more than 2,000 German investors. Results showed:
- 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
- 57% of bar and coin investors did so 'to protect their wealth'
- 28% invest in bas and coins to make good returns in the long-term
When asked why they invest in gold, the answers were extremely insightful:
Today, gold is increasingly viewed by German investors as a regular form of saving: 25% of those surveyed in 2016 said their gold purchase had been part of a regular review of their investments, while 23% said it was part of their retirement planning.
We should all learn some German
If we are to believe Western media then this year's decision by various central banks to start unwinding easy monetary policy is a signal that the gold price is set to fall. However Germans gold demand suggests otherwise.
It is clear that German investors are not swayed by the 'newspeak' the rest of the West seems so taken by. Whilst it is undoubtedly the 2008 financial crisis that set off the boom in gold demand, it is the value placed on gold as a diversifying asset that has sustained the market.
The ratio of investors buying gold bars and coins compared to those selling is around 10:1. This is despite the economy looking healthy and unemployment at its lowest since the 1990 reunification.
Clearly, German confidence in the economy is not expressed through their gold investments any longer. Instead it is their confidence in gold that keeps the market strong.
Investors and savers would be wise to pay attention to such investment logic. In countries such as the UK unemployment and wage growth are nowhere near as desirable as we see in Germany. Additionally, there are increased further uncertainties.
When the Germans sensed uncertainty following the financial crisis they did not panic about the global situation. They instead took a long hard look at their own banking system and began to diversify their savings. As a result they rediscovered their trust in gold which continues to grow year by year.
News and Commentary
Gold Prices (LBMA AM)
06 Nov: USD 1,271.60, GBP 969.72 & EUR 1,095.61 per ounce
03 Nov: USD 1,275.30, GBP 976.24 & EUR 1,094.59 per ounce
02 Nov: USD 1,276.40, GBP 965.09 & EUR 1,095.92 per ounce
01 Nov: USD 1,279.25, GBP 961.48 & EUR 1,099.52 per ounce
31 Oct: USD 1,274.40, GBP 964.21 & EUR 1,095.60 per ounce
30 Oct: USD 1,272.75, GBP 966.91 & EUR 1,093.80 per ounce
27 Oct: USD 1,267.80, GBP 968.35 & EUR 1,090.18 per ounce
Silver Prices (LBMA)
06 Nov: USD 16.92, GBP 12.90 & EUR 14.59 per ounce
03 Nov: USD 17.09, GBP 13.05 & EUR 14.67 per ounce
02 Nov: USD 17.08, GBP 12.98 & EUR 14.66 per ounce
01 Nov: USD 16.94, GBP 12.74 & EUR 14.55 per ounce
31 Oct: USD 16.82, GBP 12.72 & EUR 14.45 per ounce
30 Oct: USD 16.74, GBP 12.69 & EUR 14.39 per ounce
27 Oct: USD 16.72, GBP 12.76 & EUR 14.38 per ounce
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