Gold Buying Surge Driven By Money “Madness” Negative Interest Rates

Gold buying surged to record levels in H1, 2016 due to increasing concerns about the political, economic and monetary outlook. In particular, there are deepening concerns about the negative interest rate money “madness” of central banks today.

Heike Hofmann sells fruit and vegetables in Germany. She reacted to negative rates by cutting spending and buying gold bars. Photo: Georgi Kantchev/ Wall Street Journal

Yesterday we covered this surge in gold buying in western markets as detailed by the World Gold Council and what is driving this increased demand.  Monetary policies and their impact on savers, along with political risks, contributed to record H1 gold investment demand, surpassing even that of the 2009 financial crisis.

One of the key causes of the surge in demand in western markets and especially in older wealth economies like Switzerland and Germany and indeed in Japan is the unprecedented monetary experiment of ultra-loose monetary policies, QE and more recently negative interest rates.

Contrary to the beliefs of ideologues like Paul Krugman, assorted policy wonks, bankers and central bankers, negative interest rates are not leading to increased consumer and business spending which it was hoped would stimulate economic growth.

Quite the opposite is happening with consumers and businesses realising that negative interest rates are a result of very significant macroeconomic risk. Consequently, they are prudently deciding to save more, not less.

Many of them are buying gold and opting to save in gold due to the risks of negative rates, bail-ins of deposits of currency debasement.

Krugman – Uber Keynesian & Darling of the Monetary Illiterate

The Wall Street Journal covered this phenomenon this week and the article is well worth a read. In it they cite the example of a small business owner in Germany, Heike Hofmann who correctly views the central banks’ monetary policies as “madness”. Thus she is spending less, saving more and diversifying into physical gold bars:

“Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.

Policy makers in Europe and Japan have turned to negative rates for the same reason—to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.

When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it “madness” and promptly cut her spending, set aside more money and bought gold. “I now need to save more than before to have enough to retire,” says Ms. Hofmann, 54 years old.”
…
Many Germans worry that negative rates pose a threat to their rainy-day funds. Four in 10 Germans cite the ECB’s monetary policy and low interest rates as their biggest concern when it comes to savings, according to a survey by the German Savings Banks Association last October.

In December, Ms. Hofmann, the Korschenbroich fruit vendor, used her Christmas bonus to buy two 10-gram bars of gold. She has since bought more and has put it and every euro she can set aside, into a safe at home, saying she doesn’t trust banks. “Every time I check my savings account, it makes me want to cry,” she says.   See full WSJ article here

Some will sniff and dismiss Ms. Hofmann as an “unsophisticated” small fruit and vegetable seller in provincial Germany. However, her concerns are shared by some of the biggest institutions in the world including the world’s largest asset manager Blackrock and one of the largest companies in Germany and the largest insurer in the world – Munich Re who are allocating funds to gold.

Concerns about negative interest rates, currency devaluations and bank bail-ins are also shared by many companies. And this is where we are seeing a very significant increase in account openings and bullion sales. Last year and in recent years, we used to open a few company accounts every month. Now we are opening a few every week.

Smart money investors, savers, companies and institutions are concerned. Consequently, they are taking measures to protect themselves from this radical monetary experiment and deepening financial repression. They are rightly concerned that ongoing currency debasement and this radical experiment with our methods of payments and savings will not end well…as has been the case throughout history.