Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19
Palladium, Darling of the PGEs, Shifting into High Gear - 13th April 19
MMT is a spectacularly Dem idea - 13th April 19
The 'Silver Lines' of Opportunity - 13th April 19
Gold Stocks Bull Market Breakout Potential - 13th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Hands Off Germany's Gold!!!

Commodities / Gold and Silver 2011 Oct 27, 2011 - 03:12 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleGold 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.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules