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Gold reserves are going to play an increased role in the new economic order

Posted on 30 May 2012 with 4 comments from readers

Gold prices may have fallen out of bed over the past four months. But gold as a currency is gaining ground as gold reserves are increasingly being allocated a more important role in the coming new economic order.

Under a $3.5 billion stabilisation plan being promoted in Germany as the European Redemption Pact the heavily indebted eurozone states would use hard assets such as their gold and currency reserves to back a new type of euro bond.

Gold backed

By back stopping with gold and other currencies the fear of euro bonds opening a pandora’s box of additional spending would be closed. Basically public debts above 60 per cent of GDP would be pooled into the ERP.

Germany would still pay a higher price in terms of interest payments on euro bonds instead of its own bunds. The Latin economies of Europe would be bailed out again, though they would still need to go through recession and austerity to restore their competitiveness.

Gold is also heavily tipped for a new role in the Basle III reserve requirements for the banks. Essentially the proposal on the table is that banks be allowed to include 100 per cent of their gold assets in this ratio rather than half as at present.

See this as a promotion for gold. Banks argue that it has been a safe haven in terms of stability by comparison to other asset classes over the crisis years and so deserves to be upgraded in its reserve status. It is hard to disagree with this assessment on economic grounds.

Central banks

At the same time global central banks from Mexico to the Phillippines and Kazakhstan continue to stock up on gold while prices are low this summer. It is interesting that those countries with experience of currency instability are among the biggest buyers of the yellow metal.

It is a bit ironic then that mom and pop buying of gold from the US Mint has tailed off this year. The failing euro makes the US dollar look a one-way bet but then people forget the US balance sheet is actually in worse shape than the euro zone, so this can only be a temporary phase.

The big banks are only just getting around to taking gold seriously. One estimate from gold bullion dealer Sharps Pixley is that Basle III might result in an additional demand for 1,700 tons of gold.

For make no mistake gold prices will not stay at current levels as this becomes the global currency of choice.

Posted on 30 May 2012 Categories: Banking & Finance, Bond Markets, Global Economics, Gold & Silver

4 Comments posted by readers:

Comment by boatman - 30 May 2012

@obewon: problems in turkey coming?:

Comment by Bill on Clearwood - 30 May 2012

Spain might be going down, and need some kind of BIG bailout, sooner that even I predicted here early last year. Their 10 year yield is going up FAST. Spain is big enough to destroy the euro, if they just sit on their hands over there.
I expect Italy to become a problem during the second half of next year. But the way their 10 year yield is going up, (6.043% now) who knows if they won’t need a rescue before that.
Of course, some form of euro-bond would probably suppress the debt problem for a couple of years. Would it solve it? I doubt it.
Mark Grant was on CNBC yesterday WARNING the holders of Spanish and other European debt, that they could take a loss TO BE DETERMINED BY BUREAUCRATS instead of in the courts, if things go like they did in Greece. He said the real Spanish debt level was about 146% of GDP. Translation – you own those bonds and you could end up kissing goodbye to a substantial portion of your money if things continue to go south and they end up cutting a deal instead of paying their legal debts.
All this makes me wonder if the big banks have written credit default swaps on all these bonds. Remember AIG? They got on the hook again, and things go perfectly wrong, and the entire system could collapse within days. You might want to have some US dollars, and gold if that happens.
The US 10 year just hit a RECORD LOW – 1.659%.
The Brits just decided to send the Wikileaks guy to Sweden for trial. The Australians won’t like that, since he is an Australian citizen. Dumb move, for a small island country that could need every English speaking friend it can find, if the global economy collapses. Australia is a vast treasure trove of wealth worth many trillions of dollars, with a growing population, in a fast growing region. Sweden makes ball bearings. Of course, the judges will retire on their fat pensions. What do they care if the commoners get hungry.

Comment by obewon - 30 May 2012

Good commentary, Peter! You’ve explained it well (i.e. the real importance of gold), and in the most simple-to-understand terms.

Is There Anyone or Anything that Will Tell the Truth?
We live in a time when “truth telling” is impossible for sovereign nations and their leaders; for confirmation, take a casual look at the mess in Europe, and the massive lies that are being spread every day there. And yet the situation is no better here in the US. But then there’s always gold, because gold tells the truth about the recklessness of governments. For a great read on this topic, go here:

@ Boatman:
Tnks for the article. My wife and I had dinner last Saturday evening with some native Turkish folks, and one of the topics was the difficulties now cropping up in the Turkish economy. The article you cited is correct; Turkey not only has a current account problem, but more importantly a significant growth problem. The eastern half of the country is in serious trouble.

Comment by obewon - 30 May 2012

@ Bill, on Clearwood:

Regarding your comment: “All this makes me wonder if the big banks have written credit default swaps on all these bonds…”

The western big banks have issued CDSs of all kinds to Europe, and by the boatload. But since these banks also have total control over the ISDA (i.e. the ISDA is composed on members from the big banks!), and since the ISDA is “the sole authority” in the determination of a default, they will do exactly what they did in Greece . . . namely, “no default here, nothing to see, move on!” (followed by a bunch of ultra-secret agreements between and among the big banks).

But I believe you (& most of us) will be proven to be right. There’s a limit to how much the Euro governments and the big banks can “paper over” these massive problems. Eventually, the markets (e.g. credit markets, bond markets, swaps markets, etc.) will begin to speak.

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