Japan gets gold bug, but will fever last a war?
Thu February 6, 2003 05:59 AM ET
By Tim Large
TOKYO, Feb 6 (Reuters) - Recipe for a gold rush: Take the world's most risk-adverse investors, scare them with talk of war in Iraq, economic strife and the chance of nuclear bombs popping up across the sea.
Add a slumping stock market, laughable interest rates and the fear of a banking crisis. For good measure, throw in a pinch of "inflation targeting".
That's a pretty potent brew, and one that has sent Japanese investors scrabbling to find a safe place to stash their money.
"The Iraq crisis, North Korea, the global economy, falling stock prices, bank deposits -- all these are driving Japanese to put wealth in gold," said Osamu Ikeda, head of precious metals at Japan's top bullion house, Tanaka Kikinzoku Kogyo K.K.
Known as a sure bet in times of trouble, gold was one of last year's best-performing assets, sucking strength from global angst as it rose 23 percent in 2002.
Judging by the current excitement, many Japanese are betting it will repeat that success in 2003.
Japan has seen gold booms before -- not least last February when the government's decision to scrap full guarantees on bank deposits triggered a bullion stampede.
"This one's even bigger," said Koji Suzuki, an analyst at Itochu Futures Corp.
How much bigger?
On Wednesday, the volume of gold futures traded on the Tokyo Commodity Exchange came to a jaw-dropping 524,674 lots or 525 tonnes, compared with the previous record of 340,676 last February.
If you took delivery of that much bullion in the form of half a million 1-kg gold bars, the standard in Japan, you could make a pile 4.7 km (three miles) high -- considerably taller than Japan's highest peak, Mt Fuji.
GOLDEN OPPORTUNITY
Unlike past gold rushes, where investors have bought on the cheap, this one comes when gold prices are well above six-year highs.
Spot gold topped $388 an ounce on Wednesday, its highest since August 1996, as jumpy investors waited for U.S. Secretary of State Colin Powell to take Washington's case against Iraq to the U.N. Security Council.
Profit-taking took its toll after the speech, lopping $20 off the spot gold price and driving yen-based futures down by the daily limit of 40 yen.
But spot gold, trading at around $370 in the late afternoon on Thursday, was still up about $90 from a year ago.
Japanese may not be rushing to flog their wedding rings and heirlooms, but bullion houses report crowds of people turning up to take advantage of the high price.
Most come touting gold bars and coins snapped up in 1999 when the yen-based gold price bottomed at 917 yen per gram. The current price is about 1,500 yen.
Itsuo Toshima, Japan director of industry group World Gold Council, said the main driving force behind the current boom was not Iraq or North Korea, but home-grown economic fears that won't simply evaporate if and when U.S. tanks roll into Baghdad.
WILL IT LAST?
Toshima listed the usual suspects -- Japanese banks groaning under the weight of massive bad loans, the biggest public debt in the industrialised world -- plus a new one.
"Particularly words such as 'inflation targeting' are making people jittery about the prospect of inflation -- even if we are in the midst of severe deflation," he said.
Speculation last week that the next Bank of Japan governor could be a champion of inflation targeting reminded investors of gold's reputation as a hedge against rising prices.
Analysts say that despite Thursday's correction, most speculators on TOCOM had stuck to their long positions, hoping prices will keep rising ahead of any U.S.-led attack on Iraq.
"As in the previous Gulf war (in 1991), it's highly possible gold prices could plunge just after the start of a war," said Ha Sang-soon, general manager of asset management at ACE Koeki Co Ltd.
"But there is one difference this time," he said. "When the last war broke out, most commodities including gold had already peaked and were on a long-term bear trend. This time they have already hit bottom and are in long-term recovery mode."
That in particular is sustaining the current boom, Ha said.
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