The New Japanese Gold Rush

Adam Hamilton     February 15, 2002     5019 Words


Holy cow!  Amazingly, after trading for more than a week in the fabled $300 realm, gold continues to steadfastly hold its ground right around the psychologically-crucial watermark.  US$300 per ounce gold has considerable gravity and importance for global investors.  There is just something magical and alluring about gold over $300!  It captures the gold-investor psyche like Dow 10,000 does for equity investors.  Perhaps it is just because humans love big round numbers.


Not too many weeks ago, the prospect of gold running to $300 and staying there was merely an elusive dream for the relatively small number of hardcore gold-investors worldwide.  Before the recent exciting gold rally, which I discussed last week in my “Gold Challenges $300!” essay, I don’t think many investors thought that when gold finally ran to $300 that it would then casually hang out around the mystical number and calmly regroup.  I know that I am certainly pleasantly surprised and excited by the development!  I suspect that most gold investors, if we could warp back in time and ask them in early January, would have projected one of two scenarios when gold broke $300.


The gold optimists would have bet that once gold broke $300 it would probably rapidly run to $350 or $400+ because $300 gold would spark the fuse underneath the enormous entities betting against gold and fuel a short-covering frenzy.  I lean this way and totally expect the gold shorts to utterly panic in sheer terror at some yet unknown trigger point, although I have no idea whether it is $325, $350, or some seemingly-random non-round number like $337.41.  So far, it doesn’t look like $300 will be the magic number to send the gold shorts scurrying for cover like financial cockroaches.  But I still believe the short-squeeze trigger is definitely out there lurking like a forgotten landmine in a grassy field.  The inevitable Day of Doom for the gold shorts is approaching.


The gold realists, on the other hand, would probably have told you six weeks ago that if gold touched $300 it would then be rapidly crushed back down below more comfortable levels like $280 under an overwhelming concerted phalanx of heavy central bank and bullion bank selling.  This popular mindset is certainly totally understandable and logical given the past history of gold spiking through $300 and then plummeting back down to earth soon after, as I discussed last week.  Based on recent past experience of failed gold assaults on the $300 Maginot Line, it was a reasonable bet to make that gold would face heavy resistance and wilt under brutal fire once it attacked the fortified $300 lines.


Yet, confounding virtually everyone, gold rapidly ran up to $300 seemingly out-of-the-blue and has since lounged comfortably and lethargically around that price for over a week!  I have to smile and chuckle to myself about gold’s curious behavior, as unanticipated events like this are what make the financial markets so endlessly fascinating!  Gold is holding the $300 line without triggering a massive short-squeeze, at least not so one would notice, and the perennial gold bandits at the central banks apparently aren’t able to scrape up enough physical gold to dump onto the world markets to push gold prices back down to more “100% Central-Bank Approved” levels as in recent years.  Long live gold for doing its own thing!


Every market price on earth, including gold’s, is ultimately determined solely by supply and demand, the aggregate effect of millions or billions of individual decisions made around the globe each day involving buying and selling.  Gold was able to make an assault on $300 because someone, somewhere, was buying more than the usual amounts of physical gold.  Gold is staying at $300 because someone, somewhere is continuing to buy enough physical gold to offset central bank and bullion bank gold sales.


The 64,000 ounce question, of course, is… WHO is doing the physical gold buying?  And WHY?


I have been relentlessly pondering these very questions since gold broke through $300 last week as I believe it is very important for gold investors to attempt to discover the answers.


The big gold buyer in question is probably not the Western investment world in general.  In the United States and much of Europe, gold as an investment still continues to be about as popular as Enron executives at a Houston barbecue.  There is certainly no high-profile rush to buy gold in the United States!


The big gold buyer that pushed gold above $300 and is holding it there probably wasn’t the massive Indian market, even though India is the largest gold consumer on the planet.  The very savvy gold investors in India tend to shy away from the gold market as prices rise and pounce on it like starving tigers as prices fall.  Since the Indian consumer gold market (and other large continental Asian markets) is so extremely sensitive to the gold price, I don’t think that marginal buying of gold in India pushed it to $300.


There is, however, one large gold market that I increasingly believe contributed heavily to the growing physical gold demand that propelled gold above $300, Japan.  While geographically tiny, Japan represents the second largest economy in the world after the United States and commands colossal global financial clout.  I alluded to Japanese buying in my “Gold Challenges $300!” essay last week.  Here is the quote…


“Fourth, the gold rally this week corresponded with growing reports of serious gold-buying by a shell-shocked Japanese populace, which is comprised of the most zealous savers in the first world.  As the embattled Nikkei 225, the flagship Japanese equity index that is the equivalent to the United States’ S&P 500, sunk to a brutal 18-year low this week, reports emerged of increasingly heavy gold buying on the Tokyo Commodity Exchange.  Collectively the Japanese people, tragically long-plagued with horrible socialist market-manipulator governments who foolishly think that they can tame the free markets, control one of the largest private pools of capital on earth.”


“If the Japanese people begin to catch the hot-burning fever of goldlust, which is virtually insatiable once it takes root, the gold price will soar as the global gold market is very small compared to carefully saved Japanese investment capital.  The long-suffering Japanese investors, unlike the foolish Americans who still nurse grandiose delusions of magically regaining their forever-lost NASDAQ capital, fully understand that bubbles have serious consequences which can painfully last a decade or more.  If Japanese investors turn en masse to the unassailable six-millennia old fortress of gold for capital preservation, watch out above!”


This week at Zeal we decided to take a deeper look at Japan and its potential involvement in the recent exciting gold rally to $300 per ounce.  After meticulously digging through a lot of data direct from Japan as well as perusing several dozen media reports of heavy gold buying activity in Japan in the last few weeks, we believe that serious gold buying demand is emerging in The Land of the Rising Sun which is pushing up gold prices in the global gold markets.  This essay elaborates on the Japan hypothesis.


In order to attempt to understand why savvy Japanese investors may be turning to gold in a big way, it is useful to try and put ourselves in the shoes of a Japanese investor.  As you examine the next three charts, try to imagine what this data would mean to a citizen of Japan and what conclusions you would draw if you were trying to protect and enhance your scarce capital as a Japanese investor in Japan. 


We begin with a look at gold in US dollar terms (yellow) and gold in Japanese yen terms (blue).  While the US custom is to quote gold prices in dollars per troy ounce, in Japan gold prices are quoted in yen per gram, a convention we used in this essay.  For reference, there are roughly 31 grams in a troy ounce.



Since 2000, gold in US dollar terms has only witnessed a price increase of 5%, nothing spectacular.  Without this latest sudden gold rally to $300, gold would be virtually flat for two years, not a stellar investment in an absolute sense but a great investment in a relative sense when compared to the brutal two-year-old bear market in US stocks.  Even with flat dollar gold, US investors would have been far better off owning gold than market-darling stocks since 2000.


Our hypothetical Japanese investor, on the other hand, has seen the yen price of gold rocket up by 36.2% since 2000, with the lion’s share of these awesome gains accruing in 2001.  Because the Y-axes in the graph above are not zeroed in order to show more detailed price movements, it is not readily evident, but the exciting rally in yen gold is far higher and faster than the lethargic rally in dollar gold.  The dotted-blue trendlines define a crystal-clear rising trend channel for yen gold.  The white arrow above marks the recent breakout of yen gold, which then soon stumbled down to its old channel top but subsequently exploded upward rather than plunging back into the channel, a very bullish development.


If gold in US dollar terms had rallied a similar amount as yen gold since 2000, we would now have US$388 gold today, which I absolutely guarantee you would cause a tremendous amount of excitement, even in the incredibly jaded US investing arena! 


Japanese investors have had over a year to ponder the yen gold rally and I suspect that more and more Japanese are growing excited about the breakout action in gold every single day.


Even though a 36% absolute return over two years is certainly excellent, for the average Japanese investor yen gold’s relative attractiveness depends on what other major investments were yielding over the same period.  For example, how would our Japanese investor have fared in money market funds or bank deposits, holding yen? 


As is widely known, the interest rates in Japan are horrifically low, even by mega-inflationist Alan Greenspan’s loose and scandalous standards.  Savers in Japan, rather than being celebrated as the fantastic engines of economic growth they could be, are being brutalized by the raging socialist Keynesians in the Japanese government and Bank of Japan.  It is terribly tragic that the proud Japanese people, who are incredibly intelligent, industrious, and motivated, have been subjected to such a wholesale theft of the potential of their capital through almost a decade of artificially low and highly-dysfunctional interest rates.  For diligent Japanese savers, it is not uncommon for key savings and money-market vehicles denominated in yen to return 0.25% per year.  Yes, that is one quarter of ONE percent, a trifling pittance and outrage!


The Japanese government, just like Alan Greenspan and his socialist cronies in the US Treasury, decided to embark upon a very risky and morally-reprehensible course of trying to coerce and bludgeon savers out of cash and into overvalued and battered equity markets for selfish political reasons.  Savers in Japan were declared politically incorrect and targets of government wrath if they held cash-type investments, just as is unfortunately transpiring in the United States today in the Greenspan Siege on Savers.  Because savers and creditors in Japan can’t earn a return on their capital in the normal way by lending their money out, almost all of the returns for investors in yen-denominated savings accounts or money-market funds are achieved by changes in the relative value of the yen on the global currency markets.


Our next graph compares yen gold to the value of the yen, as depicted by the exchange rate between the yen and US dollar.  Because it takes about 130 yen to buy one US dollar, the exchange rate for the yen is commonly expressed in yen per dollar in order to avoid having to deal with minuscule decimals.  It is much easier for traders to digest the gravity of the yen dropping from 130 yen to the dollar to 135 yen to the dollar than depicting the scene as a single yen falling 3/10,000ths of a penny to $0.00741 US dollars per yen!  As such, we inverted our Y-axis for the yen-to-dollar exchange rate below to reflect this currency idiosyncrasy.  A rising orange line means it takes fewer yen to buy a US dollar, an increase in the value of the yen, and a falling line means it takes more yen to buy a US dollar, a decrease in the value of the yen.



While yen gold was up 36% in the last two years or so, the yen currency itself has plunged, much of it in the past year in an inverted mirror image to the rising yen gold price.


If, like tens of millions of other Japanese, our hypothetical Japanese investor had capital deployed in low-yielding savings accounts or money-market accounts, they watched in horror as the yen fell by 29.7% relative to the dollar since 2000.  If the Japanese investors would have had dollar-denominated savings and money-market capital investments instead of the typical yen vehicles, they would be sitting on nearly 30% gains in yen terms today.  It is a very painful and bitter fact to swallow for the legions of hard-working and diligently-saving Japanese that their “conservative” cash investments have hemorrhaged almost 30% of their value in two short years.  Ouch!


When the 36% gain in yen gold is compared to the 30% loss in the yen currency itself, the mental light really starts to shine brilliantly illuminating why so many Japanese investors are beginning to consider turning to gold.  A prudent and conservative Japanese investor who bought physical gold as an investment in early 2000 would have fared 66% better than a conservative Japanese investor who left money in the various cash-type savings investments so popular in Japan.  A 66% delta over two years is an enormous performance gap!


The unfortunate Japanese investors have been promised over and over again so many times by various governments since the great Japanese bubble burst in 1989 that a recovery was right around the corner.  Their high expectations set by their own governments have been repeatedly and mercilessly shattered, increasingly demoralizing Japanese investors.  Yen gold’s exciting rally must have caused further tough questions to emerge in the average Japanese investor’s mind.  “Why dump my hard-earned capital into the shrinking yen currency and watch my scarce wealth bleed away when I can buy physical gold, the safest investment for six millennia of human history, and see very large gains?”


While yen gold’s return trounced the yen, it also blew away stock market returns in Japan since 2000.  Our next graph shows yen gold versus the Nihon Keizai Shimbun 225 index, or Nikkei 225.  The Nikkei 225 index is the elite blue-chip Japanese equity index, kind of like the US Dow 30 and US S&P 500 rolled into one index.  The 225 large companies tracked in Japan’s Nikkei 225 are the biggest, best, and most important publicly-traded companies in Japan.



It sure hasn’t been much fun to be a Japanese investor lately! 


The flagship Nikkei 225 has plunged from 20,000 in early 2000 to below 10,000 in early 2002 for a horrific 48% loss.  And non-Japanese investors really have to stretch to understand the abysmal psychology spawned by this terrible performance.  We are not talking about some wimpy little two-year-old cub bear market as in the United States here, but nothing less than seemingly endless stock market losses for over twelve YEARS after the great Japanese equity bubble burst.


On December 29, 1989, the Nikkei 225 closed at the breathtaking level of 38,916.  Caught in the mania euphoria at the time most investors both in Japan and outside of Japan thought its markets and economy were the best in the world and had reached nirvana, certainly destined to eclipse the United States in many aspects.  Since that fateful day, however, the Nikkei 225 has grinded excruciatingly lower ever since.  Between December 29, 1989 and February 12, 2002 the Nikkei 225 has lost a staggering 74.6% of its value!


Every time I study and marvel at the monstrous magnitude of the Japanese boom of the 1980s, the Japanese bubble in the late 1980s, the Japanese burst at the dawn of 1990, and the Japanese bust of the 1990s, great dread fills my heart for American investors.  Large historical speculative manias leading to bubbles are serious, serious events.  As Japan has abundantly proved in spades, even unimaginably high and aggressive levels of socialist-Keynesian government spending and market manipulation cannot abort the cleansing of the necessary bust process.  Unless the free markets are allowed to quickly and completely wash away the speculative excesses through massive bankruptcies and pain as in the Great Depression in the States in the 1930s, the bust just wears on and on, like an endless death march through financial hell.


For Japanese investors, a 48% loss in stocks over the last two years is not something new, not a mere baby bear market like US equity investors are brazenly taunting with pointed sticks at the moment.  These continuing Nikkei losses are indescribably devastating to Japanese investor psychology.


If our Japanese investor had bought physical gold in 2000 rather than the elite blue-chip Nikkei 225 basket of equities, they would be up 84% compared to their stock-investing brethren, another gargantuan performance delta!


Yen gold has not only roared heavenwards in absolute terms since 2000, but it has utterly crushed both the critical yen currency and the Japanese stock markets.  Japanese investors, by process of elimination, are certainly beginning to notice gold in a big way, marveling at its strong performance standing out like a golden beacon of hope in stormy seas, a mighty fortress of stability in an economic world gone mad for over a decade.  Regardless of what major Japanese investment that gold is compared to, the Ancient Metal of Kings is shining brightly, starting to attract legions of Japanese investors to its safety, security, and fantastic performance.


Yen gold is way up.  Dismal yen interest rates are punishing savers.  The yen itself is way down.  And Japanese equities are way down.  This crucial macro-strategic background helps flesh out our hypothesis that the motive to buy gold should definitely exist for embattled Japanese investors. 


But do we have any evidence to back the obvious motive?  Yes.  How do we know Japanese investors are buying gold?  Two ways.


First, there is a growing blizzard of news stories emerging from Japan carried by the major global news organizations documenting increasing gold buying by all kinds of Japanese citizens.  I have read and digested over three-dozen of these stories in the last few weeks or so and most are very interesting.  In addition, these accounts of soaring physical gold demand in Japan claim that retail Japanese investors are buying bigger and bigger chunks of physical gold to take home.  Many of the stories said that the average Japanese gold buyer used to buy between 1kg and 5kg (between 32 and 161 ounces) of gold at a time, but now 10kg+ (322 ounces, worth a whopping US$97k) sales are becoming common.  And not only the raw volume of gold purchased is increasing, but the number of normal Japanese investors buying gold is growing rapidly.  And many are taking their physical gold home and refusing to put it in bank lock-boxes!


Second and perhaps even more importantly, if for no other reason than it can be easily quantified, is official data from Japan’s primary futures trading operation, the Tokyo Commodity Exchange, or TOCOM.  If you want to buy futures in Japan, TOCOM is the place to go and trade.  If you are a gold wholesaler who is witnessing exploding retail gold demand, you can go to TOCOM and buy gold under futures contract for delivery at a later date when you need it to supply to your retail customers.  If there truly is a significant rise in grass-roots physical gold demand in Japan, a reasonable assumption can be made that activity in Japanese TOCOM gold futures should, sooner or later, reflect that increase in physical gold demand as gold merchants go up their supply chains to purchase from gold wholesalers who buy large blocks of gold on the futures markets.


Of course, a Japanese gold company could also use other futures markets like London or New York to buy gold, but doing so introduces the added headaches of both a currency risk since the contracts won’t be denominated in yen on those foreign futures exchanges and added delivery expenses to ship the gold to Japan.  We suspect that many if not most large Japanese gold purchasers will stay in TOCOM to deal with the local currency in comfortable local markets.


Our final chart this week shows the last couple years or so of activity in gold futures trading on TOCOM in Tokyo.  The dark blue line, once again, is simply the yen gold price denominated in yen per gram of gold.  The light blue line represents total open interest in gold futures on TOCOM for all prices and maturities of gold futures contracts.  This is the total number of gold futures contracts that are outstanding on TOCOM every day.  Open interest rises and falls as new contracts are purchased and sold, old contracts are settled, and physical delivery of gold closes out contracts.  The solid white columns at the base of the graph show the daily trading activity in TOCOM gold futures, illustrating how many gold contracts of all prices and maturities were traded each day on TOCOM.


The TOCOM data is quite provocative and supports our hypothesis of a large increase in gold demand and buying in The Land of the Rising Sun.



In the last couple months, per official TOCOM gold futures data direct from the exchange itself, gold futures activity has literally exploded in Japan.  Open interest has skyrocketed above 400,000 outstanding contracts, with each contract representing 1kg (about 32 ounces) of gold.  Incredibly, this is even higher than during the immediate post-Y2k days when many investors and traders bought gold futures just in case something crazy happened over the date changeover.


TOCOM gold futures volume, the white columns in the background, has literally gone ballistic in the last couple weeks in Japan.  Provocatively, this spike corresponds exactly with the sudden and surprise run-up of gold to US$300 in the global markets last week.  Over 300,000 contracts changed hands on a couple consecutive days, utterly dwarfing post-Y2k gold futures trading activity and also the early February 2000 gold spike over $300 I discussed last week. 


Something special is definitely happening in the Japanese gold markets, and we believe there is a very high probability that the growing frenzy of Japanese demand for physical gold is the mighty force that pushed gold to US$300 on the global markets and is keeping it there, even as central banks and bullion banks sell into the rally with reckless abandon to try and crush it.


Incredibly, even with a much longer-term perspective the current exciting Japanese gold-buying activity appears anomalous.  My friend Sharefin of has graciously posted some long-term charts of TOCOM gold prices, open interest, and volume stretching back a decade in the past to 1992.  Sharefin’s long-term TOCOM gold chart, as well as TOCOM silver, platinum, and palladium charts, can be found at .  If you stop by and take a look, please notice two major highly noteworthy developments in the current TOCOM gold trading frenzy.


First, since 1992 there has never been an increase in open interest in TOCOM gold futures that has both been this large and rocketed-up this fast.  There have been higher open interest levels in the gold rallies of the early 1990s and after the spectacular Washington Agreement gold spike in autumn 1999, but the raw increase in TOCOM gold futures open interest of the last six weeks or so is the largest and sharpest in both relative and absolute terms.


Second, the current volume spike in TOCOM gold trading is totally unprecedented at least in the last decade.  I haven’t recently seen TOCOM data going back all the way to March 1982, when the TOCOM gold futures contract was born, but I would not be surprised at all if we have just witnessed the biggest TOCOM gold-futures volume spike in history.  When something of this magnitude happens in a major global futures market that hasn’t occurred in at least a decade and quite possibly forever, it is definitely time to stand up and take notice.


Gold demand in Japan is literally exploding.  We could be on the very verge of a new Japanese gold rush!  It is early and only time will prove whether the gold demand in Japan continues growing or not, but with the dismal performance of every other major Japanese investment option, we believe there is a high probability that investment demand for physical gold in Japan will continue to swell. 


As goldlust, virtually insatiable once it is ignited in the hearts of men, spreads and feeds on itself, a gold-buying frenzy could occur, much like the spectacular gold bubble in the United States culminating in January 1980.  As the yen gold price continues to be bid higher, more and more Japanese investors become interested and throw their capital at the seductive gold rally by buying gold.  This increased buying creates a virtuous circle which pushes gold prices higher and higher, drawing in ever more investors and eventually speculators from around the world.  We may be witnessing the birth of such a monster gold rally in Japan at this very moment.


On a more sinister note, the goofy and in-very-deep-trouble Japanese government of Prime Minister Junichiro Koizumi has shaken already fragile Japanese confidence in its failing banking system by capitulating and finally allowing a long-debated cap on bank deposit insurance in Japan to be unilaterally imposed in April 2002.  Beginning that fateful month, time deposits in Japan like CDs will only be insured to Y10m (about US$77k) per account.  One year later in April 2003 the deposit insurance limit will be applied to all regular savings deposits in Japan.


Casting aside for now the important topic of the ultimate futility and immense moral-hazards of government deposit insurance on inherently flawed fractional-reserve banking, Japan picking this turbulent moment in history to greatly scale back expected deposit insurance at a time of unprecedented economic uncertainty, widespread bank problems, and travail in Japan is probably not the wisest of decisions. 


We have seen many estimates on the total amount of Japanese capital that will suddenly become uninsured time deposits in Japan’s increasingly rickety banks this April, but most hover around the Y100t mark (yes, that is 100 TRILLION yen), about US$770b.  In addition, another Y100t is expected to become uninsured next April in 2003 when regular demand-savings deposits see their insurance capped at Y10m per account.  These numbers are enormous folks!  Even an adjective-addict like me is at a total loss for superlatives in describing the raw magnitude of US$770b worth of Japanese deposits suddenly becoming uninsured this April and another US$770b losing coverage next April.


What if savvy Japanese are diversifying out of paltry-low-yielding cash in banks because they fear losing deposit insurance in the most debt-plagued and fundamentally unsound first-world banking system on earth?  Of course, no one knows where the flight capital will go or even how much will flee the banks, but I bet the amount will be substantial.  I know, even though the United States Federal Deposit Insurance Corporation is a total scam that would be exhausted in about three hours in a real US financial crisis, that I certainly would never keep more than US$100k (the US deposit insurance cap) in any one bank account just in case my bank blew itself up with derivatives or plain failed.  I am sure many Japanese feel the same way!


For argument’s sake, imagine that 50% of the US$770b of time deposits suddenly becoming far more risky sans insurance in a couple months will belong to Japanese investors who are nervous about having their capital tied up in uninsured accounts in shaky banks yielding less than 1%.  This assumption leaves US$385b that needs to find a new home before April.  Imagine that 10% of this sum, a small number in light of gold’s spectacular performance in Japan, decides to seek refuge in the Ancient Metal of Kings.  At US$300 per ounce, US$39b could buy a staggering 130m ounces of gold!


130m ounces of gold is equivalent to about 4043 metric tonnes of the heavy yellow metal.  This is a gargantuan number!  Last year, only roughly 2500 tonnes of gold were mined globally.  If one half of the central estimate of total Japanese capital that will suddenly be uninsured in April flees the wobbly Japanese banks, and just 10% of that half seeks safety, preservation, and wealth enhancement in physical gold, the global gold price could roar significantly higher.  US$300 gold is just the beginning if the Japanese are indeed about to launch a new gold rush!


If fresh gold demand of 4000+ tonnes is suddenly about to explode onto the world markets from the long-suffering Japanese investors, there is no way for central banks to quietly sell enough gold to cap the rally at $300.  It takes a long time, measured in years, to dig new gold mines and bring newly mined gold to market no matter how high the gold price runs.  An explosion in Japanese physical gold investment demand could only find enough supply if the US dollar gold price is bid much higher to entice more investment gold supply back onto the world markets.


Although it is certainly early, we believe the data strongly suggests that something extraordinary is happening in the Japanese gold markets.  Gold investors all over the world should carefully monitor the Japan situation.  If our hypothesis of massive increases in marginal demand for physical gold in Japan proves correct, if we are right that a new Japanese gold rush is indeed brewing, watch out above!


US$300 gold is sure a nice blessing and is most welcome, but we ain’t seen nothin’ yet!


Adam Hamilton, CPA     February 15, 2002     Subscribe