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The New German Gold Rush

Monday, May 17th, 2010

The German Financial Times (FTD) reports that Germans are ordering gold, especially gold coins, in unprecedented amounts. Frank Ziegler, head of precious metals at Bayern LB is quoted with the words “People buy Krugerrands like crazy”. But other coins are in high demand too: Münze Austria, which makes the “Wiener Philharmoniker” coins talks about “Panik-Käufe” (panic purchasing). The spread between coin gold and the gold market price has risen to 8% - usually it is 2%.

Most likely it is the German fear of inflation, reaching a fever pitch after the Greek bail-out, that drives gold sales. People still have the historic memory of the hyper-inflation 1923 and the currency reform 1949 which detroyed the paper savings of millions. Some market experts are fanning the flames: Quirin Bank’s (a private bank based in Berlin) chief strategist Claus Vogt said last week that “in 8-10 years our money [the Euro] will be worth only the half”. This statement implies an inflation rate of more than 5% starting in 2011.

However, we believe that this panic may be ill-informed. Gold is not a particular good inflation hedge and the price of gold may have already reached a near peak. Rick Bookstaber, well known risk expert and former hedge fund manager, who is presently an adviser to the SEC, has warned investors about the gold bubble on MyPrivateBanking.com. Germans should heed his advise - in the long-run, returns from gold have been near zero.

 
 
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