Where Have All The Gold Holdings Gone?

The Bombay Bicycle Club in Adelaide decided to give customers a taste of the government’s medicine. It multiplied all prices on its menu board by 2.75. That’s the same multiple it must pay staff on a public holiday.

The increase took wage rates to over $50 an hour. The $7 bread became $19.25, lamb korma became $65 and the customer feedback became expensive too. ‘Here’s a quick maths formula. Multiply zero (which equals the amount I will now spend at your establishment) by 2.75 and see what it equals’ wrote one customer. Apparently he didn’t realise this was precisely the restaurant owner’s point.

Of course, if the business owner did the same thing and gave up on the business because of rising costs he’d come under even more fire now.

The solution, as always, is to let the free market set wage rates. If people don’t want to work on public holidays, they won’t. That will bid up wage rates because of supply and demand. Probably not by 2.75 times though.

But the government has its own problems when it comes to paying people. You see, it pays people to do nothing. Then it’s surprised when so many people turn up at Centrelink. And by so many people we mean around one in five Australians are receiving some form of welfare according to Federal Social Services Minister Kevin Andrews.

Of course, nobody knows how many people are cheating the system versus deserving a helping hand. But five million Australians on welfare? And Australia isn’t exactly doing it tough compared to the rest of the developed world. Our unemployment rate is low. And we’ve got our mining and gas boom to keep us going, right?

Well oil giant Shell no longer wants a part of either. It’s decided to sell, delay and scale down its operations left right and centre. First it was job losses and delays at its partner Arrow Energy’s Queensland operations. Then the company sold out of its WA Wheatstone LNG projects. Another US$15 billion in assets could be on the market over the next two years.

If this is what a boom looks like, we’d hate to see a recession. But it’s coming regardless.

The international markets were quiet overnight because the US was closed for Martin Luther King Jr. Day. The Aussie dollar managed a new low at 87.66 cents. The last time it was trading there was July 2010, just as the move well above parity began. Chinese GDP came in slightly above expectations for 2013. But it only expanded 1.8% in the fourth quarter of 2014, less than expectations.

Much more interesting than GDP was that China’s working age population shrunk by 2.4 million in 2013. That’s after a 3.45 million drop in 2012, which was the first ever.

Take a look at this population pyramid. It shows how many males and females are in each age bracket in China today.

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Source: Census.gov

The first thing you might notice is that 6 million missing workers aren’t a lot when it comes to China.

We discussed the topic of demographics and its effect on the Japanese stock market in our recent issue, published this week. So the first thing Money for Life Letter readers might notice is how familiar that chart looks to Japan’s in 1990:

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Source: Census.gov

1990 was the year Japan’s stock market peaked and an 80% drop began. It was when the 20 year ‘lost decade’ started.

So is having an arrow shaped population pyramid a sign of trouble? We think so. Especially for investment markets.

Who are all the elderly people going to sell their investments to as they cash out to pay for retirement? There won’t be enough young buyers around to absorb the assets. At least not at decent prices. In other words, Chinese investment assets including shares and property could be in for an epic bear market.

If you’re sceptical that demographics have an effect on markets and the economy, you can look to the skyscraper index instead. Long story short, skyscrapers happen to be a good indicator of economic boom and doom. Each time a country builds a new ‘tallest tower’, an economic bust tends to follow in short order.

There are dozens of examples, but in keeping with our demographic story above, the Tokyo Metropolitan Government Building was finished in the early 1990s. Just why skyscrapers are such a good economic indicator is a great topic for debate. But the point is China’s tallest skyscraper is nearing completion.

We only mention China in today’s Markets and Money most hesitantly. That’s because they have outdone the Germans. And, being a German, that’s personally distressing.

You might be wondering ‘but at what have the Chinese outdone Germans?’ Normally we’d answer ‘Does it really matter?’ But today, it really does matter.

In coming months, China is expected to announce an increase in gold holdings from 1,054 tons to 2,710 tons according to Jeffrey Nichols, managing director of American Precious Metals Advisors.That’s well short of Germany’s own 3,390 tons, second only to the US. So why the whinging?

Well, Germany might own the gold, but it doesn’t have it. And when it comes to owning gold as a safe haven asset, it’s all about having it.

About half of Germany’s metal is at the Federal Reserve in New York, as Die Hard 3 fans will know. And some of it is kept in Paris too. Apparently free of charge. Isn’t that nice? (Rumour has it the French lost much of their own gold in a submarine sinking in 1942. But it may have been recovered by none other than Jacques Cousteau in 1967.)

Anyway, in January 2013 Germany asked for all its gold from the French and a good chunk from the Americans. A rare burst of national pride swept Germany when it was reported that GSG9, the German version of SWAT (or Grenzschutzgruppe 9 der Bundespolizei if you really want to know), was going to oversee moving the gold. Historically German police wearing helmets and black in France is not a good sight.

The French delivery went off without a hitch. But only five of the 300 tons have arrived from the US so far. The Americans plan on taking seven to ten years to repatriate the gold!

So, as you can imagine, the conspiracy theories are springing up faster than you can say Mr Van De Fluege. (That’s the name of the character who steals the gold from New York in Die Hard 3.)

To quell the rumours, the Bundesbank decided to let the press see the repatriated gold bars to confirm they had the same serial numbers as the ones on the Bundesbank’s books.

Just kidding. They melted them down to prevent anyone from knowing if it was the same gold as was stored in New York all these years.

So here’s the twist. If the Americans sold Germany’s gold, they’d have to buy it back.  But there are already shortages of physical gold being reported by investors who want to take delivery. So buying the 300 tons for physical delivery would have a big impact on price. Unless you do it very, very slowly over a period of seven to ten years.

Of course, the media has made sure to ridicule anyone who is sceptical about whether Germany’s gold is actually in New York. Case in point is this photo used by NSNBC to portray the German politician leading the gold repatriation charge…in this case literally.

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Source: NSNBC

We couldn’t help thinking of a German 80s song called ‘Der Goldener Reiter’, which means golden rider. But the ridicule is backfiring. More and more politicians are joining the calls to repatriate all the gold, not just some of it. In fact, the politician recently appointed to manage trans-Atlantic relations has demanded it too. 

So how is this relevant to you? Well, if Germany tries to repatriate the rest of its gold from New York, that’s going to place the physical market under real pressure if the Fed doesn’t have it at the ready.

That aside, gold is an asset that is designed to protect you from a financial meltdown. And geopolitics is a common source for that kind of trouble. If governments themselves are scrambling to protect themselves by repatriating their gold, and Germany is far from the only one doing this, then good news could be on the horizon for gold. Unfortunately, that probably means bad news for just about everything else.

Regards,

Nick Hubble+
for Markets and Money

Nick Hubble

Nick Hubble

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.