Summary: Battered by geopolitical woes and economic stagnation, Europe's business people are looking for safe havens.
Key take-out: Gold and Australian gold stocks are on the radar of Europeans frightened of the future.
Key beneficiaries: General investors. Category: Economics, gold.
Migration is a two-way street in Europe. People coming in are easy to see. Money flowing out is less obvious but is a potentially bigger issue and the one that is working in Australia’s favour as nervous Europeans seek safe havens for their capital.
Gold, Swiss francs and US dollars are at the top of what is becoming a period of significant capital flight, a point noted while I was on a visit to some of Europe’s financial centres this month.
London was the starting point to measure the mood after the successful “Brexit” vote, but it was in Paris, and the French holiday resort of St Tropez, that the low lights and the highlights of Europe’s capital flight could be seen and heard.
The low point came when staying in a flat immediately adjacent to Notre Dame Cathedral at the same time a terrorist attack was being foiled. At the time I had no idea what was happening but it was impossible to overlook the fact that security was not being provided by French police but by the French army in five-man, heavily-armed, patrols, with not a smile to be seen.
In Australian vernacular this was a "dinkum event", and while some people might have missed it I was struck by the use of silent hand signals by the patrols as they moved around corners as if they were in a Vietnamese jungle a lifetime ago – with Vietnam a one-time trouble spot the French and Australians know a lot about.
Paris, to put it mildly, is nervous. Crowds are to be avoided and the economy is wilting, along with the rest of France. So concerned is French business that a “positive protest” was mounted (literally) when 600 French executives rode up and down the Champs Elysee in mopeds to demonstrate their confidence in the economy. The result, of course, was the opposite.
Preparing for an Aussie gold rush
If incoming migrants, and a stagnant economy which is bogged down by strict economic controls and inflexible labour laws, are one aspect of Europe today, there is the flipside of St Tropez. It's a resort of legend and a favoured hideaway of the rich and famous (though mainly in the hills to the north and the villages to the south).
It was while visiting some of the residents around St Tropez, backed up by an overnight stay in Monaco, that the other side of the European migration story could be heard (rather than be seen) because money doesn’t make a noise another than a polite rustle over a glass of rose.
While there I was able to speak with a number of British expats who move seamlessly (and privately) between London and the south of France.
Perhaps it was because I was an Aussie financial scribbler lost in a sea of money that the prime topic of conversation was mainly the markets, share prices and share tips. Of particular interest was an Aussie's view of gold and Australian gold equities.
Having just spent a few days on a hardship posting to Western Australia’s gold capital of Kalgoorlie to attend last month’s Diggers and Dealers conference, I was well primed on gold – but nothing prepared me for the high level of interest in gold among the Brits in St Tropez and its surrounds.
The people asking the questions were not your average group of investors with limited understanding of the intricacies of financial markets but truly sophisticated professionals who read the fine print of legal agreements.
In one case the person in question who caught my attention was a London property billionaire (who asked to not be named) who had become fascinated by the speculative end of the Australian stock market in the way some people follow thoroughbred horses. At one time he had a stake in 50 small explorers and miners.
Company names, share tips, comments about management, and observations about characters active in the Australian market, was the lifeblood of conversations with the very rich of St Tropez, but on a level well beyond anything in Pitt or Collins streets, or Perth’s St George’s Terrace.
These are rich people with family and self-made capital beyond the scope of most Australians. They know where it came from, they know how to keep it, how to make it grow, and they have the financial firepower to move the mining sector of the Australian market.
But to me, the contrast of money in the south of France and Syrians and others sleeping in the streets in the north, plus the Notre Dame bomb-scare and memories of recent terrorist atrocities, was a stark reminder that Europe is not well.
Making the situation worse is the Brexit vote, which will eventually see the region’s second-biggest economy leave the comforts of a Euro-home to try its luck in the global village – much like Australia was forced to do 40 years ago.
Seasoned London investment bankers, including Bob Catto from Hobart Capital (and late of Williams de Broe), do not regret the Brexit vote. In fact they welcome it as a chance to break free of the restrictions being forced on a traditionally free-wheeling British financial system and economy.
It’s easy to agree with Catto after seeing the absolute mess into which the French economy has fallen with its rigid rules strangling business, its appalling migrant crisis which seems to be on every corner, and its army-patrolled streets.
European fears on the rise
Conversations with Parisians, once they discover you are not British or American, seems to invariably turn to migration. Even the bar tenders and waiters want out of a country under a two-sided attack; economically by its own government and militarily by terrorists.
Boil that equation down and you’re looking at a situation not seen since before Perestroika (Russian reform in the 1980s) and the fall of the Berlin Wall, a time when people living close to the East German border sewed gold coins into the lining of their coats in case a quick exit was required.
Gold is back for Europeans frightened of the future, and while the sharp price recovery of the first six months of 2016 appears to have paused, it is easy to see gold making a return in 2017, perhaps hitting the $US1700 an ounce mark suggested by Deutsche Bank three weeks ago.
Chart: Deutsche Bank has highlighted that the gold price - traditionally sensitive to the rate of central bank balance sheet expansion - has lagged the big four central banks' expansion since its sharp correction in 2013.
Source: Deutsche Bank, Bloomberg Finance LP
Underpinning this hypothesis are the two other great drivers of gold:
- Negative interest rates and the prospect that at some stage governments in Europe might resort to “helicopter money”, the ultimate in pump-priming to try an ignite an inflationary outbreak, which would make gold look even more attractive than today, and;
- The wild card of Donald Trump being elected as the next US president, with the grave uncertainties that would unleash.
For Australian equities the story remains tilted towards gold and gold equities. Even the rich of St Tropez can see that and are undoubtedly using the conditions as a trigger to move money out of harm’s way into a safer place, which is what Australia looks like from the other side of the world.