Japanese pension funds like the shine of Gold

Japanese pension funds intend to double their investments in gold, in an answer to government plans to inflate the Yen in an effort to inspire an economic growth. The investments will double in next 2 years - reaching 100 billion yen ($1,1 billion) from 45 billion yen at current moment.

The sum of $1,1 billion is not very high to affect seriously the market of gold. But the decision of Japanese pension managers shows the thinking in financial sector. Japanese pension funds counted altogether are the second largest pension system in the world after the pension system of USA.

Obviously it is not only the Japan funds that are afraid of inflation and are searching for a protection.
Printing money, currency wars and inflation is the "easy decision" that irresponsible governments around the world has "found" as a mystic and miracle decision to the economic crisis. A champion of this is Obama with his more that $1 trillion deficit per year. Some such type of countries - like Greece, has already gone bankrupt ,followed by Portugal, Ireland, partially Spain, and in near future - Italy, and even France. After the last elections in Japan, the new government blamed the "too expensive" Yen for economic troubles and decided to devalue it. This strategy is not something new. So called "currency wars" are exactly this - every country is trying to improve its export by devaluing the currency. Then its competitors are doing the same, and as a result - all currencies together are going down, compared with stable assets - like gold, food and energy.

It is not clear if Japan competitors will allow Yen to devalue. USA and EU also have serious problems, and need an economic growth. As they believe in the same pro-inflation mantra, it is probable their money-print to compensate the Japanese one, an as a whole nothing to change.

But much will change with the saved money of people, and the largest savers are future retirees. So the managers of these funds are seeking for a protection and gold is a good choice.

In fact not only pension funds are rediscovering gold. Every investor that has some common sense is buying gold. It is obvious that this money-print race can not remain without consequences.

At current moment most of gold investments are in so called "paper gold". These are gold derivates connected with the price of gold. I.e. these are some types of guarantees, promises, that someone will pay you back the value of the asset on the current price of gold. The existence of gold derivates creates de facto a larger gold market and meets the increasing demand.

But it is not sure what will happen when a fear of devaluation of derivates themselves appears and people and investors start searching only for real physical gold. If only it must meet the demand, then the price will have to skyrocket much times (why not 10 times or more) in a very short period of time.

Up to now there is no symptoms of changing the government thinking. Governments are deeply indebted and having high budget deficits. They need and create inflation to address these their problems at account of the whole society, and mostly at account of the savers. This is so called "inflation tax". The way to avoid it is to avoid using the government issued pieces of paper, called "money"...

Jan 8th 2013

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