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The Fight For Dreamtime Gold

Commodities / Gold and Silver 2011 Jul 14, 2011 - 11:25 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleGERMANY SAYS
By July 13, in the space of one week, Europe's dramatic monetary, financial and economic meltdown had spiralled up several notches to feature ever more strident, irrational and impossible claims and counterclaims from the rightly named political and economic 'players' responsible for the mess. Outside Germany, most media coverage presented this as Germany-versus-the-rest. The strongest economy in Europe, with the biggest gold reserves in its central bank was laying down the law on what happens next. Unreality notched further up with the German claim that this time around, in the constantly growing spiral of sovereign debt crises and bailouts in Europe, the private banks, insurers and other key players such as mortgage lenders will have to shoulder plenty of the costs - which in fact is impossible.

Chancellor Angela Merkel's government promised parliament that it will push for a "substantial" private-sector contribution, with MPs from both the ruling coalition and opposition parties saying banks had gotten off lightly, so far. German banks and insurers agreed on Thursday, 30 June to roll over their holdings of Greek debt maturing in the next 3 years to 2014, but this offer was dismissed by leading members of Merkel's coalition as a mere 'placebo' because the offer would include 1.2 billion euros from Germany's two publicly owned "bad banks" -- the FMS Wertmanagement and EAA -- meaning that taxpayers will pay.

 Euro zone policymakers, pushed by Germany want private bondholders across the Eurozone to chip in for around 30 billion euros of the second aid package for Greece, probably at least as big as last year's 110 billion euro bailout organized by the European Central Bank, the IMF and the Union's financial and economic institutions. Europe's private banks, insurers and other beneficiaries of state bailouts following their own debt, deficit and insolvency crises through 2008-2010 are far from debt-free and confident today, despite their nicely presented, carefully worked EBITDA. Forcing them to poney up for Greek Adventure-2, with Italy-1 looming is more than a fine balancing act, and more like an outright folly. Most of these 'players' have a sombre track record of playing the wrong numbers on the world's financial gaming tables, and a large chunk of them remain "bad" banks, either officially or in reality. Throwing bad money at risk-riddled debt is somewhat unlikely to give big winnings, but this is nowhere to be heard in a crisis that is now impossible to solve by tried, trusted-and-failed methods.

To be sure, the official numbers for central bank gold reserves often need to be taken with a pinch of salt, or a pinch of the titanium dust lurking underneath the gold topping on doctored bars and ingots, that badly intentioned persons sometimes claim to exist in quite a lot of central banks. There are also official gold reserves that simply aren't there, but swapped through and by arrangement with the IMF, now run by former near-world-class swimming champion, Christine Lagarde.

But when all else fails and paper money loses its appeal, in a big way, governments will be eyeing the gold reserves of countries with imploded national finances, forced to pay double-digit interest on their sovereign debt. Monetary specialists can point out Italy as a prime example. For years, in fact ever since the country was reconstituted after World War 2 and until Italy joined the Eurozone as a founding member, it had a basic money management policy: keep the Lire weak and national gold reserves strong. Italy built them to No. 3 in the world, at an official count of about 2451 tons today.

For an average leading politician or great decider, with a great CV highlighting their previous leading roles, as a swimming champ for example, so many tons of gold must seem like a lot of dosh. They will look at the current, fast growing gold price close to $1600 an ounce, with $1800 and $2000 in view perhaps, and pinch themselves with excitement about the number of Rolex gold-plated watches a kilo would buy: perhaps even 10 or 12 high range Rolexes. 

Reality is a downer, for them. At present gold prices, a ton fetches about $50 million. The world's entire and of course official central bank reserves of the 180-odd central banks reporting to the World Gold Council is almost exactly 30 000 tons. Don't work it out in Rolex-equivalents, but compare it with national debt financing and budget deficit financing needs - for Italy and other PIIGS, the USA or Japan, and plenty other debt-strapped countries. And the result is a shock. All the gold of all the world's central banks, roughly one-fifth of all above ground gold that exists on the planet, has a present worth or NPV of around $1500 billion at current gold prices. This is far, far short of one year's US Federal deficit, managed so well by Happy Changey Obama, who contemplates with ease the vast number of unemployeds in his country despite, or perhaps because of his Federal money printing orgies.

Eyes in Europe are swivelling to Italy's 2451 tons as Italy prepares to slump into hyper-debt, the strange thing being it already was in hyper debt "but we didn't know". Its national debt is around 120% of GDP and growing fast, much faster than its almost-zero economic growth. Relative to its debt and debt financing needs, Italy's official gold reserves are peanuts, that is all.

The above simple figures are likely too complicated for an average leader to understand. To them, gold is gold and worth a lot. At times of panic, like now, national gold reserves should come in handy to keep the party, inch'allah. They can shore up the vast piles of debt accumulated through years of outright and totally irresponsible and incompetent money management, by central banks, and the same applied to the economy, by political deciders. Gold is also all they have left. After years of selling national assets, called 'privatization', where croney corporations friendly with Big Government get heavily underpriced assets, which they mostly dilapidate, national gold is now on the block.

Any forced central bank gold sales at this time will have an electric effect on the daily gold bullion market. We can imagine several scenarios, most of them featuring a "gold hyperbolic" trajectory for the price, but the proceeds from forced selling will have almost zero effect on the out-of-control debt crises wracking so many economies. The two stories will play out separately for some while, but not forever. For political deciders, at least their advisers able to understand the difference between a Rolex and a ton of gold, gold prices of even $2000 an ounce are a sign of far out and total panic. Probably before that price level, although many analysts would and can double it, big bad things have to happen.

We then enter the Dreamtime Economy. To be sure, economic and monetary historians can tell us about Germany in 1922-23, helping explain Germany's attitude today, but at that far away time Germany's money meltdown was walled off and separate from the rest of the world. It was not a lead-in to an almost simultaneous meltdown right across the world, and the German paper-chaff money of 1922-23 was not legal tender for the entire world's commerce and trade. Russia's taste of money meltdown in the 1990s is another example of "adjustment" to unprecedented loss of faith in national money - but we have international loss of faith in global moneys, today.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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