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"...
With a sight account, the depositing
central bank merely has a counterparty claim on its gold deposits, which
allows the Fed or BoE for example, to sell, swap or lease the deposited gold
as it sees fit: sight accounts are simply a means for a central bank to
expand the apparent supply of gold in the same way a commercial bank expands
bank credit."
Alasdair Macleod writes: Recently there
have been reports that if Greece defaults on the new bail-out package,
creditors will be entitled to seize her gold. Whether or not this is true, it
raises one big question: given the severe financial and economic crisis in
Europe, what is the current collective attitude of the eurozone
central banks to gold?
Bear in mind that these central banks sought to end any monetary role for
gold after the Bretton Woods system fell apart in the early 1970s. More
recently, as signatories to the three consecutive Central Bank Gold
Agreements, they have perhaps seen gold as a source of funds as well. But
those were “happier times” for them, when progressively greater
central planning and increased regulation went unchallenged by the markets.
But now that monetary authorities are facing increasing criticism, the
central banks’ strategy towards gold today must logically be completely
different: either gold is an asset whose value has to be maximised
as collateral, or it has to be held on to as a “last resort”
asset. Vested interests have fundamentally altered with the change in
circumstances now forced upon eurozone governments.
The rise in gold prices to current levels underlines the point. Based on
official figures, the eurozone’s share of
official gold holdings as a proportion of the total global stock has fallen
from 9% when the euro was introduced to only 6% today. Furthermore, an unknown
quantity of this gold is held at non-eurozone
central banks, particularly the Federal Reserve, Bank of England and the Bank
for International Settlements, in sight accounts. With a sight account, the
depositing central bank merely has a counterparty claim on its gold deposits,
which allows the Fed or BoE for example, to sell, swap or lease the deposited
gold as it sees fit: sight accounts are simply a means for a central bank to
expand the apparent supply of gold in the same way a commercial bank expands
bank credit.
The ability to create gold through the sight account system has been
fundamental to bullion market liquidity in the major trading centres since the Second World War. Problems will arise
when confidence in the system is questioned: for example, how much of
Greece’s gold actually exists, and what has happened to any gold Greece
transferred to the European Central Bank as its joining fee? This question is
suddenly relevant to all central banks, not just the 17 euro-area members. We
don’t know if this was in Hugo Chavez’s mind when he demanded the
repatriation of Venezuela’s gold, but it may well have
been. The subject has also been raised by investigative journalist, Lars Schall, with respect to Germany’s reserves at the
New York Fed.
As central bankers mull the point over they may well conclude that among all
their troubles there is one more that must be avoided at all costs: the
possibility of a gold run by the smaller central banks on their larger peers
in the major bullion trading centres. It would be a
consequence of the deepening crisis involving fiat money and credit, and if
this is allowed to occur all confidence in paper
money itself would be at risk.
Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and
economics. Alasdair has a background as a stockbroker, banker and economist.
He is a Senior Fellow at the GoldMoney
Foundation.
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