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BookmarkThe Federal Reserve looks set to ‘taper’ by some $10 to $15 billion. Monthly purchases of U.S. Treasuries may be scaled back by $10 billion to $35 billion, while mortgage bond buying may remain unchanged at $40 billion.
This is putting pressure on gold and may lead to further weakness in the short term. Soon investors will realise that the very small reduction in debt monetisation actually shows how weak the U.S. economy is.
Ultra loose monetary policies are set to continue which is positive for gold in the medium and long term.
Japan is set to see gold demand soar in the coming months due to a planned sales tax, concerns about the solvency of the government and a continuing devaluation of the yen.
Japanese investors and savers are reviving their interest in gold as the new government’s policy of ending deflation through unprecedented monetary stimulus weakened the yen 13% against the dollar this year and led to yen gold remaining near record nominal highs, highlighting the role of bullion as a hedge against currency depreciation and inflation.
Japan’s gold imports more than tripled to 14.2 metric tons in the seven months through July 31 from a year earlier, government data shows.
Bloomberg reports that Japanese gold retailers are preparing for an acceleration in gold purchases in the next six months if a planned sales tax increase is carried out.
Prime Minister Shinzo Abe will decide whether he will go ahead with a plan to raise the tax to 8% in April from 5%. Japan boosted the tax to 5% in April 1997 from 3%, the first increase since the nation introduced the duty in 1989.
Demand for gold from Japanese investors more than doubled to 24 tons in the first quarter of 1997 from 9 tons in the previous three months, according to the World Gold Council.
“A rout in the bond and currency markets could boost Japanese demand for gold as a haven,” said Naomi Suzuki, an economist at the Sumitomo Shoji Research Institute in Tokyo.
A rout in the bond and currency market is almost guaranteed given the appalling state of Japan’s finances.
Japan Public Debt in Trillion, 1996 To July 2013 – (Bloomberg)
The Japanese national debt surged over the $1 quadrillion yen or 1,000 trillion yen in early August.
Think about that word quadrillion for a moment or two, because understanding it will help you understand the scale of the debt crisis in Japan and much of the western world.
Our parents thought a million was a very big number. Then a billion became the big number. Recently, a trillion entered the lexicon as a big number.
A paltry million is the numeral one followed by six zeros. A billion? Nine zeros. A trillion is a thousand times bigger again at 12 zeros. But the mighty quadrillion is a one with fifteen zeros after it or 1,000,000,000,000,000 (as the eye strains).
Compared with Japan, the United States national debt is a mere $17 trillion or so. But if you convert that number into yen, it comes to about 1.6 quadrillion.
We laugh at children when they talk about bazillions and gazillions but a quadrillion is no laughing matter. Measuring any currency in quadrillions brings to mind the many hyperinflations seen in the 20th and 21st centuries. For example, the powerful and very wealthy Germany in the early 1920s and wealthy Zimbabwe, the breadbasket of Africa in 2008.
Japan’s soaring national debt is already more than twice the size of its economy.
Even at current all time record low interest rates, Japan spends nearly 50% of its tax revenues on interest payments. The Japanese 10 year government bond is trading at just 0.70% today. At borrowing costs of 2% to 3% per annum, two to three times current rates, Japan’s interest payments will be an unsustainable proportion of tax receipts.
Higher interest rates will also trigger problems for Japanese banks, Japanese pension funds and insurance companies, which also have large holdings of Japanese government bonds(JGB’s).
This is leading to and will lead to a surge in demand for gold as a hedge and safe haven.
From tiny levels given the level of savings in Japan, investment in gold bars and coins more than doubled to 4.5 tons last quarter from 2.1 tons a year earlier, the World Gold Council data shows.
Gold in Japanese Yen – 2008 to Today (Bloomberg)
Gold demand increased in recent months as a slump in the international market made bullion more affordable to investors. The Japanese government’s economic policy boosts expectations for inflation and the Japanese yen fell on international markets.
The volume of gold trading on the bourse, known as Tocom, expanded 27% to 9.5 million contracts in the eight months through August 31st from a year earlier. Abe’s economic policy weakened the yen and boosted yen-denominated gold prices.
Gold futures on Tocom climbed to a record 5,081 yen a gram ($1,592 an ounce) on February 7th and closed at 4,165 yen a gram or 128,802 per ounce today.
