There’s Gold in Those Bills

by | Mar 6, 2002 | Archives

See how recent legislation can impact gold prices soon.

Dear International Friend,

Recent messages looked at some pros and cons of the U.S. dollar and what might happen to the price of gold. Here is an article from Bloomberg that shows how legislation, not from the U.S. but Japan, could mean the precious metal may soon rise.

“Japanese savings switching to gold

By Taizo Hirose, Takahiko Hyuga and Miki AnzaiBloomberg News Service TOKYO”

Japanese consumers are buying more gold as they decide to take their money out of banks before April, when the government caps its deposit guarantee.

Japan plans to limit its guarantee to $75,208 per depositor when banks fail. The specter of that cap and the yen's 7.7 percent fall against the dollar since Dec. 1 are prompting wealthy Japanese to flock to gold, said Taizo Kimura, sales manager in a futures unit of Mitsubishi Corp., Japan's largest trading company.

The flight from savings accounts comes as consumers and economists worry about Japan's flagging banks, which are laden with bad loans and may need more government help to survive the nation's third recession in a decade.

“This would be another warning that lenders need to act promptly to expedite bad-loan disposals, as smaller lenders have already seen their deposits falling,” said Shinichi Ichikawa, a strategist at Credit Suisse First Boston Securities (Japan) Ltd.

If banks don't show improvement, the loss of deposits could accelerate and undermine Japan's already shaky financial system by limiting liquidity and stifling new lending, Ichikawa said.

Moody's cut

Moody's Investors Service yesterday lowered its outlook to “negative” on credit ratings for Sumitomo Mitsui Banking Corp., Mizuho Holdings Inc. Units and other Japanese lenders.

The U.S. rating agency, citing concern that the new cap on deposit insurance will “create another destabilizing factor in the currently fragile financial conditions of Japanese banks,” said that it fears a string of bankruptcies among small lenders won't end by March.

Eitai Credit Association this month was forced into bankruptcy. Almost 100 of the nation's 658 credit unions and associations, mainly serving individuals and small businesses, failed between October 1998 and the end of last year.

With fears rising over possible bank failures, especially among smaller lenders, many Japanese are uneasy about the new limits on deposit insurance. The government will cap time deposits in the first year of the new limits and all accounts thereafter.

“We come across customers with rolls of notes in a band with the bank's emblems,” said Osamu Ikeda, a spokesman at Tanaka Kikinzoku Kogyo K.K., Japan's largest gold retailer.

“The more people have social and economic anxiety, the more people buy gold.”

Sales this month at Tanaka's 130 stores will rise fivefold from year-earlier levels, Ikeda said.

The generic gold futures contract traded on the Tokyo Commodities Exchange has risen 10 percent since the beginning of December, hitting a 39-month high earlier this month. Ikeda said that spot prices are up 37 percent from the five-year low hit in September 1999.

Activity 15 times higher

In November and December, gold sales at commodities brokerage Ace Koeiki Co. Increased 15 times over the year-earlier total, said company spokesman Katsushige Yamazaki.

The company will advertise in newspapers in coming weeks to promote gold and point out the coming limits on deposit insurance, Yamazaki said. “Given record-low interest rates, falling stocks and banks' bad-loan problems, people see gold as a stable investment,” he said.

At Mitsubishi Materials Corp., Japan's biggest nonferrous metals maker, gold sales in December quadrupled from a year earlier, said Tomoyuki Okuchi, a trader for the company, confirming a Nihon Keizai newspaper report earlier today.

Sales are accelerating further this month, he said.”

The debate continues. Will the dollar rise or fall versus gold? Timing is difficult to tell, but fundamentals suggest a dollar fall and a major wave of buying such a this could have an enormous impact.

Until next message, good global investing!