Central Bank Gold - A European cause of dissent
Germany is adamant that its gold reserves, the world's second largest, should not be used in helping bail out debt-ridden Eurozone economies. What are the arguments for and against?
Posted: Friday , 11 Nov 2011
In recent days we have heard that several G20 leaders of the world's major economies discuss the possibility of Eurozone countries pooling their borrowing rights at the International Monetary Fund to provide greater leverage for the EFSF. The Bundesbank holds Germany's Special Drawing Rights, secured by its gold reserves. Apparently, the proposal had caused tension between Bundesbank President, Jens Weidmann, and Finance Minister, Schaeuble, as well as between Weidmann and the ECB.
The Economy Minister of Germany stated that "German gold reserves must remain untouchable!". The Bundesbank and a spokesman for Chancellor Angela Merkel also ruled out the idea. This argument harks back to the time when the government and the Bundesbank argued over whether to sell some of Germany's gold in the second Central Bank Gold Agreement. At that time Axel Weber, the then Bundesbank President stated that gold in German foreign exchange reserves acted as a "counter to the swings of the U.S. dollar".
Prior to that, the head of the French central Bank, M. Noyer, had said that selling gold from the reserves was like "selling the family jewels". Unfortunately, President Sarkozy was Finance Minister at the time and forced the sale of 600 tonnes of French gold, a decision, we have no doubt he regrets to this day, because of the loss made by selling gold and buying U.S. dollars at the time. Then the gold was sold to support the advent of the Euro. Now the reason for the use of gold is very different.
As we have forecast for so long, gold's use is being advocated as collateral for Eurozone Sovereign loans.
Of course it is easy to commit someone else's gold to your cause, but a very different matter to get them to use it as such!
BUNDESBANK GOLD "OFF LIMITS"
Germany's reaction to the proposal was understandably a rejection of the proposals by France, Britain and the U.S. to have German gold reserves used as collateral for the Eurozone bailout fund. Why should they put their gold as security to the debts of Greece, Italy and anybody else for that matter? To do so would to leave the future of their gold reserves in the hands of other governments that have a record of over-borrowing. Sadly, when other people guarantee your debt, it is almost an invitation to take their money.
Governments that have sold their gold, whether to support the U.S. dollar as it embarked on a future without backing or the advent of the euro, have the bitter memories of selling it far, far below its value today. Britain under George Brown sold half its gold reserves at the horrendous price of $275. The rest of the central bank gold sales over the last decade have been made at below $1,000. Since then, the silence from the central banks and governments that supported such sales has been deafening.
With the visible sight of currencies without any backing and indeed the entire present monetary system weakening, losing confidence and now facing a future of accelerated weakening, governments are keeping a firm grip on their gold. There have been virtually no gold sales since 2009 and from then on we have seen central banks from the emerging world, on a broad front become buyers of gold, led by Russia and, we believe, China.
ISN'T THIS THE GOVERNMENT'S DECISION?
Thankfully, gold and foreign exchange reserves are under the care and protection of national central banks and not governments. Central Banks generally act independently of government the world over. And there is a reason for this that goes to the present Eurozone debt crisis itself.
Imagine if politicians had control of their nation's reserves. Their inherent habit of over-borrowing would have engulfed all these reserves by now years ago. There would be none left, for sure!
Gold and foreign exchange reserves are held to ensure that even in a war situation, the country is able to pay at least their next three months of international trade bills. They are the funds available to governments when all else has been used up.
Gold and Foreign Exchange Reserves are thus last resort international money.
For a nation to have any credibility financially, these reserves have to be available simply to service the needs of a nation, not their obligations. In wartime, when forgery becomes a weapon of war, gold is still internationally accepted between enemies. Until then, no matter what, these reserves must remain untouched for the sake of that nation. Politicians repeatedly keep pointing at gold reserves to cover their debts and do so as a distraction from the problem. In the Eurozone crisis, we are surprised that this issue has not been raised until now. But here it is and as before, destined to go back to the dustbin.
But the situation in the debt-distressed nations of the Eurozone is getting worse by the day and not being fully covered in the media. A huge flight of capital is underway draining these nations of the capital needed to continue to function as viable nations. What appals us is the failure of the weaker nations of the Eurozone, the PIIGS nations, not imposing Exchange and Capital Controls to prevent the wholesale flight of capital from their shores even while using the euro as their currency. The Treaty governing the Eurozone allows this, for relatively short periods. Because they have failed to do this, the capital in their banks has largely left these nations and flown to Germany and the like. Effectively this is a run on their banks. This money won't return unless there's good reason for doing so and only if it's safe from either bank liquidation, a return to their old currencies or free from the danger of government control then. But the horse has bolted.
In addition, the banks holding the debt of these PIIGS nations are selling it off as fast as they can ahead of any write-downs. If you know you are going to have 50% of it written off, it pays to sell it for any price higher than 50%.