Why the "Smart Money" in Japan is Investing in Gold

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Some Japanese investors were thrilled as gold prices swooned this week, because they got a chance at investing in gold at a bargain price. 

Tokuriki Honten Co., the country's second-largest gold retailer, reported Tuesday that Japanese investors doubled their gold purchases this week from the week before.

And Reuters reported how 63-year-old Yujiro Yamashita traveled to Tokyo's Ginza district to buy gold for the first time in 20 years.

Why?

It's thanks to fears stemming from Japan's new monetary easing, known as "Abenomics."

What is Abenomics?

Japan's new prime minister, Shinzo Abe, and the head of the Bank of Japan, Haruhiko Kuroda, plan to inject $1.4 trillion into the Japanese monetary system over the next two years.

The undertaking is one of the biggest economic experiments ever. It aims to do whatever it takes to stoke the waning Japanese economy, plagued for two decades by deflation. Japan's far reaching official inflation target for 2014 is 0.9%.

In the wake of Abenomics, Japanese equities have soared.

But as Money Morning Chief Investment Strategist Keith Fitz-Gerald explained "disappointment is the more likely outcome when reality sets in."

"Japan's been unable to hit even 1% despite 23 long years of trying and 8 to 10 failed stimulus plans," explained Fitz-Gerald.

Instead, the result of Abenomics will be volatile markets, near-zero interest rates – and a possible economic crisis.

Abenomics and Investing in Gold

Until recently, gold prices in Japan have been held down by a persistently strong yen.

But as the yen continues to depreciate against the dollar, thanks to Abenomics, gold in yen terms has remained pricey. The weaker Japanese currency pushed yen-denominated gold prices to near record levels last week.

Some Japanese citizens initially took advantage of the spike to sell gold.

But now, as more acknowledge the Abenomics reality Fitz-Gerald cautioned about, others have raced to buy bullion, fearing the following:

  • Inflation;
  • A national debt more than twice as large as its annual economic output;
  • An end to the country's stock market rally;
  • Near-zero interest on bank deposits;
  • And the sensitive situation in the Korean Peninsula.

"Investors in gold are convinced that Japan's fiscal position will get worse. What I see at our counter is that more people are getting worried about Japan. That's why we are seeing a lot of buying," Tanaka Kikinzoku Kogyo, general manager of Japan's top bullion house, Tanaka Kikinzoky Kogyo, told The New York Times.

It looks like gold has regained its stature as a store of wealth and a safe haven asset in the Pacific nation.

"The smart money is on buying gold rather than selling," Mark O'Byrne, research director at Dublin's gold dealer GoldCore, told The Wall Street Journal. "Given the BOJ's determination, there's no doubt you're going to get 2% inflation and there's a risk it might be much, much higher. For those who are prudent, diversifying into gold makes sense."

Get the full story on gold prices and investing in gold: If You're Worried About Gold Prices, You Need to Read This

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