Germany Starts War on Gold / Commodities / Gold and Silver Stocks 2020
Germans,like Indians and Chinese, love their gold - although their reasons for buyingand keeping bullion are somewhat different.
InChina and India, gold jewelry is a status symbol - a sign of wealth andsuccess. In Germany, owning gold bars and coins, maybe a 24-karat necklace ortwo, is a means of preserving wealth, especially in times of war or economiccrisis, something never far from Germans’ minds, considering theirhistory.
Indeedthe “war guilt” Germans experience over the atrocities of Nazi Germany isaccompanied by fears that their government could again lose control of fiatmoney, as the Weimar Republic did in the 1920s, leading to devastatinghyper-inflation.
InIndia “a marriage is not a marriage without gold.” Indians find it auspiciousto be-gift gold jewelry during the Diwali festival, which begins in October,and wedding season. Gold-shopping for the bride is thought to bring goodfortune and invoke the blessings of a Hindu goddess. At nearly 20 millionweddings a year, Indians’ annual demand for the precious metal exceeds 514tonnes. Easy to see why the country’s private gold holdings are the largest inthe world, a mind-boggling 24,000 tonnes. (almost as much as the world’s top 10central bank holdings combined)
Howeverin 2016 China overtook India as the world’s top buyer of gold jewelry. Thecountry’s growing throng of affluent consumers is driving demand for goldrings, bracelets and necklaces, especially in January and February when manyChinese purchase gold jewelry as gifts for Chinese New Year. According toMcKinsey & Company, by 2025 China will represent up to 44% of the globalluxury jewelry market.
Whilethe populations of China and India are known for liking physical gold, Germanyflies under the radar. An astounding +26 million Germans have investments ingold bars and coins. In fact far more Germans have savings in physical goldthan in the stock market - a statistic hard to imagine in the United States orCanada.
Accordingto a recent survey by the Research Center for Financial Services on behalf of Reisebank,Germans currently own 8,918 tonnes of gold worth 330 billion euros (USD$367.5billion), just over half (55% or 4,925 tonnes) in bars and coins.
Goldfans may also be surprised to know that Germany’s central bank is loaded upwith more bullion than any other’s, except for the United States, 3,366.8tonnes versus 8,133.5t held by the US Treasury, most of which is in Fort Knox,Kentucky.
Afour-year plan to repatriate 674 tonnes of German gold held at the Banque deFrance and the Federal Reserve of New York was completed in 2017.
Yetthese facts and figures indicating strong gold buy-in are incongruous with anew German law that severely limits the anonymity of citizens’ gold purchases.In this article we are asking, “Why are Germans lining up for gold?”
“Tafelgeschäfte”
UntilJanuary 1, 2020, the maximum amount of gold an individual could purchase inGermany, without disclosing personal information, was €10,000. However in response to a European Union directive targetedat money laundering and terrorist financing, the German government set a new, far lower limit of €2,000.
Thewholly predictable result? Panic gold buying, with long lines of customersqueuing up outside the country’s precious metals shops and gold dealershowrooms, during the last days of December.
“Weare currently being overrun,” Börse Online, Germany’s leading investormagazine, quoted the managing director at Degussa Edelmetalle, one of Germany’sbiggest gold dealers, regarding the situation. “The queues go up into thestreet.” The other large trader, Pro Aurum, reported a tripling of normal ordervolumes.
Thelegion of gold buyers, of course, were there to purchase under €10,000 worth of gold, in anonymoustransactions that don’t require identity checks, before the new rule kicked inon Jan. 1, 2020. Their rightly justified fear was that passing on one’sinformation to the seller, then on to the government, would allow thegovernment to, if it wished, confiscate their gold, as has been done severaltimes historically, detailed further down in the article.
Thereare a few interesting points to make about this legislation. The first is, whydid they even bother to include precious metals? The fifth EU Money LaunderingDirective, introduced by the EU in 2018, set out new requirements to preventmoney from being laundered and used to finance terrorist groups. A laudablegoal, it was directed at over-the-counter transactions known in German as“Tafelgeschäfte”, where the customer purchases an investment or security inphysical form, such as bearer bonds, an equity security with attached dividendcoupons, or precious metals bars and coins.
EUmember states are given flexibility in how they implement EU directives. Yetdespite the directive not saying anything about precious metals, in November2019 the German parliament, the Bundestag, passed a law that lowered thethreshold where precious metals can be bought without identify checks (akaanonymous transactions) from €10,000 to €2,000. This now includes purchases of the popular 1-oz gold coin.
Asecond point concerns the timing of the legislation. Just three years ago, in2017, the Bundestag changed the threshold from €15,000 to €10,000 - suggesting the German government is moving veryrapidly to increase the transparency of gold transactions.
Thelast point is the most interesting: Why? According to the 2019 bill, “The findings of the national risk analysishave shown that, especially in the area of gold trading, heavy cash transactionsare taking place just below the current threshold for identificationobligations of 10,000 euros… The threshold of EUR 2,000 envisaged in the draftlaw aims to prevent or significantly limit this bypass trade.”
Theproblem here is that, when questioned by German parliamentary deputies aboutthe law and asked to provide evidence for it, the government either claimed tohave no knowledge, or deferred responsibility to the Länder (provinces).
Forexample, it could not say what is the annual volume of precious metals tradingin Germany, how many people living in Germany bought precious metals usinganonymous cash transactions, or what was the annual volume of cash transactionsfor precious metals.
Thequestion that really exposed the government’s lie - that it is targetingprecious metals for money laundering - was “In how many reporting or criminalcases was there a reference to precious metals?”
Datarecorded by the Central Office for Financial Transaction Investigations (FIU)found that of 137,097 suspicious transactions reported to the FIU, only 239cases related to precious metals - ie. 0.17%! And of these 239 cases, only fourinvolved amounts below the €10,000 threshold.
Theupshot? There is no evidence that over-the-counter cash purchases of preciousmetals have anything to do with money laundering in Germany.
Sowhy would the government lie? There must be some other reason to target smallgold purchases - ridiculously, even buying a 1-oz gold coin in Germany will nowtrigger an identity check. Bullion dealers are required to keep a record of alltransactions over €2,000, for five years, and must by law surrender them ifasked to by the authorities.
Whilewe cannot know the answer, we have a few theories:
The governmentthinks the German economy is in trouble due to excessive savings.The governmentis creating an information base for later gold confiscation. The governmentdoesn’t want its citizens to own gold because their financial/ personalinformation can’t be easily tracked.Takingeach in turn, we find Germany’s central bank taking extreme measures tokickstart economic growth which slumped to a six-year low in 2019. The anemic0.6% growth rate was due to a number of factors including a slowdown in itsnormally booming auto sector. Car production last year fell to its lowest innearly a quarter century; layoffs have occurred. The country’s economy expandedat the slowest rate since 2013, the height of the eurozone’s debt crisis,dragged down by a manufacturing contraction of 3.6%.
Negativeinterest rates were introduced to provide an incentive for financialinstitutions to lend more money, but the tactic hasn’t worked. Economistsexpect growth this year to barely budge.
“Thenext decade will be a decade of underperformance, and people may once again starttalking about Germany as the sick man of Europe,” the Wall Street Journal quotes Joerg Kraemer, chief economist at Commerzbank in Frankfurt.
Oneof the biggest problems is consumer spending, or to be more precise, the lackof. In the United States, Canada and other developed nations, close to zero andnegative interest rates have fueled consumer and business spending, along withinvestment in the stock market. Not so in Germany, where citizens have shunnedgrowth-bearing assets like real estate and stocks, preferring to sock theirsavings away in deposit accounts (and gold).
Accordingto the OECD, Germans save 11% of their disposable income compared with lessthan 7% in the US. Another article in the Wall Street Journal states:
Last year, German households added €108.7billion to their bank accounts, more than any time since the euro wasintroduced, according to Deutsche Bank research. Cash and bank deposits, at€2.5 trillion, make up 40% of Germans’ financial assets, according toBundesbank data.
And while saving for a rainy day sounds prudent, it’s not making Germans anyricher. With a median household income of €61,000 (USD$67,000), Germans are theleast likely of all European to own their own homes.
InNovember consumer sentiment in Europe’s largest economy fell to the lowest level since November 2016, as Chancellor Chancellor Angela Merkel’s coalition ofconservatives and Social Democrats (SPD) resists calls for a stimulus packageto kickstart the largest economy in Europe.
Couldthis ingrained mindset of low spending and high savings among Germans beinfluencing the government’s latest foray into regulating precious metalstrading? It certainly appears likely. If gold and silver buyers are made tooffer up their personal information when making a bullion/ jewelry purchase,they might, instead of saving euros, consider spending that disposable income,which would help the ailing economy.
Thesecond rationale for the rule change might be that the German government wantsto make it easier to track people’s gold purchases in case they need/ want it.There are several historical instances of this happening, including in Germany.In 1939, $97 million worth of gold belonging to Czechoslovakia was stolen byNazi Germany when its army invaded Prague.
OnApril 5, 1933, President Franklin Roosevelt signed an executive ordercriminalizing the possession of gold. Americans were required to deliver theirgold bars, coins and certificates to the Federal Reserve in exchange for $20per ounce. The limitation on gold ownership wasn’t repealed until 1974 byPresident Gerald Ford.
Othercountries have appealed to their populace in times of crisis, to give theirgold to the government. In 1935, when Italy was mired in recession, BenitoMussolini passed the “Gold for the Fatherland” initiative. Some 35 tonnes ofjewelry and coins was collected then melted down, turned into gold bars, thendistributed to national banks. Those who donated were given a steel wristbandthat read “Gold for the Fatherland”.
In1997 during the Asian financial crisis, South Korea asked citizens to donategold to help pay back a $58 million bailout package from the IMF. Appealing toSouth Koreans’ national pride and sense of shame for accepting a foreignbailout, nearly 3.5 million people, almost a quarter of the population, donated226 tonnes valued at $2.2 billion. People’s gold necklaces, coins, bars,trinkets, statuettes, medals, pendants and military insignias were promptlymelted into gold bars that helped pay off the IMF loan in 2001, three yearsahead of schedule.
Ourthird theory on why Germany wants to limit gold ownership through lowering theanonymous transaction threshold is a little conspiratorial, but nothing we’reabout to share is untrue. It can all be fact-checked, and we invite you to doso.
Sincethe 1970s and ‘80s, the banking system has become reliant on debit and creditcards. Many years ago I wrote an article titled ‘Ignorance is a Temporary Condition’ that explained how the switch from cash to credit hasresulted in over-spending and high levels of consumer indebtedness. While thefigures in the article are dated, its salient points still ring true, and bearrepeating:
Inthe early 1970s a nationwide electronic funds transfer system was envisioned.The system would use individualized electronic identification cards anddigitized bank accounts with merchants connected to them by telecommunicationlinks.
Butit wasn’t until the 1990s that credit and debit card use really caught fire.
Isgoing cashless a good thing? Not for most people, we tend to spend more when webuy things with a credit or debit card instead of cash:
“Drazen Prelec and Duncan Simester reportedstudies on this topic in a 2001 issue of Marketing Letters. In one study, theytold that randomly selected participants in the study would be offered theopportunity to purchase tickets to an actual professional basketball game thathad just sold out. These tickets were highly desirable. Participants were toldeither that they would have to pay in cash or that they would have to pay bycredit card. They were asked how much they would be willing to pay for thesetickets. Those who were told they would have to pay by credit card were willingto pay over twice as much on average as those who were told that they wouldhave to pay by cash.”
ArtMarkman, Ph.D., Psychologytoday.com
Payingwith cash, actually pulling the money from a wallet or purse is a vivid enoughaction to elicit a negative, and in some consumers a mildly painful,psychological reaction that’s absent when either a credit or debit cardtransaction takes place.
Alongwith incentivizing card holders to spend freely, inconsequentially, theinception of debit cards provided banks, businesses and government agencieswith an endless trail of data from which to track card holders’ spendinghabits. It was the beginning of the surveillance state around which GeorgeOrwell constructed his book ‘1984’.
Indeed,governments are constantly implementing new ways of restricting the useof cash and invading citizens’ privacy.
A2019 article in creditcards.com describes how owning a credit card is like having “anelectronic bug in your wallet.” That’s because each time a purchase is made ondebit or credit, a record of that transaction is logged into a databasecollected by the credit card issuer.
Banksuse this data to determine a card-holders credit-worthiness, giving theminformation on raising credit card interest rates or reducing credit limits.
Miningcard issuers’ data also gives banks a means of fraud detection, turning overinformation to law enforcement, and the most insidious - marketing. Accordingto the article this is done by tracking the “merchant marketing code” (MCC), afour-digit number that denotes the type of business. MCCs can be used forexample to restrict health-care spending on health care-related credit cards,or to prevent employees from abusing company credit cards.
Thepurchasing information is used to build a spending profile of the cardholderwhich is either used by the card issuer, say to up-sell the cardholder withadditional banking products, or is sold to advertising firms, which bombard thecardholder with digital advertising.
Inthis day and age of smart phones, banks have also reportedly started tracking customers’ cell phonelocations in order to crack down on fraud- ie. if a transaction takes place away from a cardholder’s phone, there is ahigher likelihood the purchase is fraudulent. The benefit of reducing fraud andits associated costs to credit card companies must be weighed against theinvasion of privacy that occurs knowing that your bank is aware where you areand what you are buying at any given moment.
Goldpurchasers go “off the grid” in that they are independent of this type ofinvasive surveillance. It makes sense then that the German government, likelypressured by the banks, would take steps to restrict gold ownership.
There’salso the idea that banks, and governments, like consumers to be in debt. In theUS consumer spending accounts for 70% of the economy, so increasing spending inas many ways as possible clearly benefits the government, both in terms ofhigher revenue from sales taxes, and stimulating the economy through purchasesof more goods and services.
Governmentsreward mortgage holders by allowing them to deduct mortgage interest on theirtaxes. Businesses that take out loans to purchase equipment for “capitalimprovements” can also take a tax deduction from the interest.
Alsoconsider, the Federal Reserve favors inflation to deflation, because higherprices, and spending, mean the economy is growing.
Spendingmore on credit cards, and mortgages, of course is great for banks and otherfinancial institutions, which collect more in interest andpayments.
The2008-09 financial crisis boiled down to a crisis of mortgage debt, withderegulated banks accepting too many loans from high-risk homeowners who shouldnever have been granted these loans.
InNorth America particularly we have become a society of spenders and debtors,mentored by the worst role model one can imagine, the US government whichcurrently has a national debt of $23 trillion and counting.
Conclusion
Owninggold is a way to get out of this “debt trap”, but governments don’t want you toown gold. They prefer you to invest in the stock market, in real estate, tomake all your purchases on debit or credit because these transactions aretrackable. You are trackable. Thelast thing the government wants is a bunch of gold bugs running around“off-grid” especially during tough economic times, when they could be shoppinginstead of tying up their money in gold bars and coins.
Perhapsthis explains why the Germans have fired the first shot in the coming war ongold.
By Richard (Rick) Mills
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