Germany and Gold

The world's fourth largest economy by nominal GDP, and the fifth largest by purchasing power parity. The third largest exporter of goods in the world and the richest country in Europe. The country famous for automotive industry, great culture and excellent beer. Germany. What are its links to the gold market?

Germany’s Gold Reserves

The official German holdings are 3371 tons (as of June 2018), the second largest in the world. Percentage - wise, gold accounts for 70.6 percent of Germany’s foreign reserves. However, much of that gold used to be stored outside of the country (due to the fear of the Soviet Union invasion). Hence, in 2013-2017, the German central bank repatriated almost 700 tons from the Banque de France in Paris and the Federal Reserve Bank of New York. Now, just over half of all Bundesbank gold is stored by the Bundesbank in its own vaults in Frankfurt.

German Gold Production, Trade, and Consumption

Germany neither is a significant producer nor an exporter of gold. However, the country is an important importer. In 2015, Germany ranked tenth place, with import of gold worth $4.5 billion. It shouldn’t be surprising as the Germans bought a lot of gold. In 2016, consumer demand in Germany amounted to 121 tons. In total, €6.8bn was ploughed into German gold investment products that year. Moreover, the amount of gold bought by the Germans per person in 2016 was greater than in either of the two gold powerhouses: India and China.

German Gold Market

As in Switzerland, there is a strong positive sentiment towards gold in Germany. This love of gold stems from the experience of the Weimar hyperinflation of the 1920s, which led to national skepticism about fiat money. In contrast, for Germans gold stands for stability. The WGC’s 2016 survey of more than 2,000 German investors revealed that: 59 percent of the respondents agreed with the statement that “gold will never lose its value in the long-term”, 48 percent agreed with the statement that “owning gold makes me feel secure for the long-term”, and 42 percent agreed with the statement “I trust gold more than the currencies of countries”.

It indicates that gold is indeed perceived as the safe-haven asset, or a tool of wealth preservation in the long run. Germans’ move towards gold accelerated during the Great Recession. German investors started to worry about the stability of the domestic banking system and, later, during the European sovereign debt crisis, the whole Eurozone and the euro. The ultra-loose monetary policy implemented by the ECB did not help to calm Germans, who remained suspicious of quantitative easing and zero interest rates (or even negative yields).

German Economy and Gold

Germany is the true powerhouse of the Eurozone. Therefore, what happens in Germany affects the gold market. The main channel of impact is the currency channel, as the yellow metal is positively correlated with the EUR/USD exchange rate. When it increases, the price of gold also goes north. When the dollar appreciates against the euro, the gold prices tend to decline. The EUR/USD exchange rate is mainly shaped, aside market sentiment, by interest rate, inflation and economic growth differentials between the U.S. and the Eurozone.

The important thing here is that Germany is the leading European economy, which accounts for 21.1 percent of the whole European Union and 29.2 percent of the Eurozone. Therefore, German developments have a key significance for the Eurozone economy, which in turn affects the euro’s strength vis-à-vis U.S. dollar, and then the gold market. Although not perfect, there is a positive correlation between the price of gold and the EUR/USD exchange rate, as the chart below shows.

Chart 1: The price of gold (blue line, right axis, London P.M. Fix, in $) and the EUR/USD exchange rate (red line, left axis) from January 1999 to May 2018.

EUR/USD exchange rate and gold prices

The key takeaway is that Germany is the powerhouse of the Eurozone. Therefore, the state of German economy affects the euro’s strength, which in turn has impact on the gold prices.