The Euro Mess Brings Out the Best in Gold
Source: Eric McWhinnie, Wall St. Cheat Sheet (11/9/11)
"Over the past 20 years, central banks were net sellers of gold holdings, but recently turned into net buyers as concerns about paper money and massive global debt plague the market."
Germany has rejected proposals by France, Britain, and the U.S. to have German gold reserves used as collateral for the Eurozone bailout fund. Germany has not forgotten what hyperinflation feels like, nor the need for precious metals as a safe-haven. According to the World Gold Council, Germany has 3,401 tons of gold, which accounts for nearly 75% of its reserves. Germany Economy Minister Philipp Roesler said, "German gold reserves must remain untouchable." There was speculation over the weekend at the G20 summit that German gold may be sold in order to boost the European bailout fund. However, the Bundesbank and Mr. Seibert, spokesman for Merkel, ruled out the idea of Germany parting ways with their gold reserves. Mr. Seibert explained, "Germany's gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit Cannes."
Germany's reluctance to bring its own gold into the bailout conversation magnifies gold’s safe-haven status, and shows that nothing is as good as gold. It also shows that Germany realizes that the euro mess is not ending anytime soon. German Chancellor Angela Merkel explains, "This debt crisis will not simply go away. It will certainly be a decade before we are in a better position." Italian 10-year government bonds are also screaming that better days are far away, as interest rates head north of 6%. While the Greek tragedy is serious, Italy and its sovereign debt of more than $2 trillion is a much bigger problem. Without any one willing to provide funds for a bailout, the situation for Europe looks dire.
There are reports that Greeks are pulling money from their banks (while they still can), in order to buy gold coins. In his November 1 post, Economist and Nobel Prize winner Paul Krugman writes, "The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro." It appears the bank run is already underway. Although Krugman has criticized gold, his bank run theory is playing out, and people are resorting to the ancient safe-haven metal.
For thousands of years, people have turned to gold and silver as a storage of wealth, especially in times of turmoil. This time is no different. The Eurozone debt crisis has brought out the best in precious metals by reminding the world about the downfalls of fiat currencies. As Germany proved, in more ways than one, there is no substitute for gold. Even central banks, which apparently only hold gold for "tradition", are turning into net buyers. Over the past 20 years, central banks were net sellers of gold holdings, but recently turned into net buyers as concerns about paper money and massive global debt plague the market.
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