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Gold still represents the ultimate form of payment. Why throw it away
before the Euro collapses...?
"HANDS OFF!" shouts German newspaper Bild
today. "Failed states are still going to get our gold," screams the tabloid's
headline.
Hmmm.
"This may not be true," admits the opening sentence of the article
itself. "But nevertheless!"
So
what is getting Germany's version of the New York Post and Britain's The
Sun - only with topless models on page 1, not 3 - so excited that it has
to admit its own headlines are false in the very next line? "If
Germany's exposure to the Euro-crisis rescue plan is expanded, it will be
only a matter of time before the gold
of the German Federal Bank melts in the debt fire!" reckons Bild columnist Einar Koch.
Not
so fast, Eurocrats. Ruling coalition party
politician (and "Euro rebel") Peter Gauweiler says that "Our gold reserves, only
half of which by the way are still stored in Germany, are sacrosanct! Who
knows how urgently we will need our gold treasure!"
Bild sures
loves exclamation marks. But might it be onto something? Might the Euro
bail-out mobsters gathered in Brussels to save the single currency really
attack the world's second-largest national gold reserves - a full 3,401 tonnes - to raise cash where the European Central Bank
won't print it?
In
a word, no. Bild's rabble-rousing blocks
them politically, while the terms of the Euro treaty blocks them legally. So
never mind that even Germany's hoard, worth
€135 billion at Wednesday's London PM Fix, is barely
equal to half of Greece's outstanding debt. Selling the family silver would
signal the final, ultimate crisis - Götterdämmerung
- yet again. National central banks cannot use their reserves to plug holes
in their government's finances (as the Banca d'Italia and ECB had to remind
Silvio Berlusconi in 2009), let alone another
government's books.
This
isn't to say they shouldn't. Eurozone central banks hold 61% of their
reserves in gold after all. So they are "overweight
gold by any measure" as GFMS chairman Philip Klapwijk
put it in 2010, just as the obvious buyers (or cash lenders), Asian central
banks, are "underweight" by the same token with just 3% of their
huge foreign currency reserves, on average, in gold. Nor is it to say they
can't; British chancellors got the Bank of England to breach its Charter of
1844 three times in the following 20 years, as Brad
DeLong notes, printing more money than the law allowed in
"extraordinary and unforseen
emergencies".
Nor
are we saying there's no precedent for it. Some 346 tonnes
of gold was used as collateral by 10
commercial banks in Europe just last year, raising Dollar loans from the
central banks' central bank, the Bank for International Settlements, in what
the BIS called "regular commercial activities". Romania used gold as collateral to secure
foreign-currency loans in 1974, as Dr. K.Lakshmi of the Saudi University relates, scrambling
to deal with balance of payments problems after the first oil-price crisis.
Italy did the same that year, with German chancellor Helmut Schmidt acting
with Bundesbank president Karl Klasen
to lend Rome $2 billion without
first alerting the West German central bank's decision-making council.
India similarly raised cash using gold bullion to restock its foreign
currency reserves after its balance of payments crisis of 1991 (also sparked
by an oil-price shock after Gulf War I), pledging 20 tonnes
via UBS in Switzerland and 40 tonnes via the Bank
of England to secure IMF support - support it then
reciprocated, long after repaying the loans, by buying 200 tonnes of IMF gold to help restructure the ailing
Washington lender's own
balance-sheet in 2009.
Note,
however, that all these states were very desperate. Note also that they were
very much alone, rather than part of a currency union supposedly built on
mutual support and respect. Note too that the loans raised were for the
national central bank's foreign exchange reserves - run down by attempting to
defend its singular currency on the forex markets -
rather than paying down debt. The massive European gold sales of the late
1990s and early 2000s did the same, turning gold into other government's debt
but not being used to finance spending. Indeed, even the Russian economic
meltdown ofmid-1998 only saw rumors of outright gold sales. The reported
data merely showed a swap - gold for cash, with the two set to be
switched back in due course - of much less than the 200 tonnes
whispered in London's gold market.
And
who wants to ape post-Soviet Russia just yet anyway?
"Gold
still represents the ultimate form of payment in the world," as then-US
Fed charman Alan Greenspan told Congress in 1999.
"It's interesting that Germany could buy materials during the war only
with gold. In extremis fiat money is accepted by nobody and gold is always
accepted and is the ultimate means of payment..."
For
now, the Eurozone doesn't need to resort to using gold to raise cash. Because like
Peter Gauweiler suggests, even with a tabloid screetch, such a move might just prove all-too necessary AFTER
the Euro pact fails and the union dissolves. Italy knows this. Greece,
Portugal and Spain too. And not least the current union's richest member -
and the world's second-largest gold holder - Germany.
"Before
one gram of Bundesbank gold is pawned, the Greeks,
Portuguese, Spanish and Italians must first throw their gold on the
market," says Einar Koch at Bild. And seeing how much they'll want to keep
hold of their gold right now - just in case - that
puts Germany's 3,401 tonnes a long way from the
market today.
Adrian Ash
Head of
Research
Bullionvault.com
You can Receive your first gram of Gold free by opening an
account with Bullion Vault : Click here.
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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