Dude, where’s my gold?

At the end of January Venezuela received the last of their 160 tonnes of repatriated gold reserves. Many, including some of the country’s own economists thought Chavez was mad to bring back the gold; that it was an expensive and unnecessary operation.

But now it seems distance makes the heart grow fonder for other countries as well with reports of both Germany and Switzerland on the verge of requesting the return of their gold from the United States. This is not surprising considering both countries were at the forefront of the increased gold demand in Europe in 2011. Germany particularly saw an increased demand for physical bars in allocated accounts.

It is interesting that whilst governments and their central banks choose to implement Keynesian-based policies when trying to quickly fix their economies, they cannot bring themselves to rid their country’s reserves of the barbarous relic. No domestic prices, in the West, are currently tied to gold, ‘nor does gold sit in reserve for any of the West’s currencies. So why are they so concerned?

The people’s gold

In Switzerland, as in Germany, it is the citizens who seem to be most concerned as to the location of their gold. It is, after all, theirs as the four parliamentarians presenting the ‘Gold Initiative’ point out. The Initiative stated the Swiss people should vote on the following:

i)                    The gold of the Swiss National Bank must be stored physically in Switzerland;

ii)                   The SNB does not have the right to sell any more of its gold reserves;

iii)                 The SNB must hold at least 20% of its assets in gold.

In Germany a Parliamentary Budget Committee is set to investigate how the country’s gold reserves are managed. At present the gold reserves represent 42% of money held in reserves. The investigation has come about as a result of the German Federal Audit Office’s criticism of Bundesbank’s management of the country’s 3,396.3 tonnes of the yellow metal. The Audit Office is said to have buckled to the pressure of German citizens and politicians interested to know where their gold is.

It is believed 60% – 70% of the country’s gold reserves are kept at 33 Liberty Street, the Federal Reserve Bank of New York. The official line is; it is kept here to facilitate trade and payments. German newspaper, Bild, report that Germany’s gold reserves in the US have not been audited by the Bundesbank since 2007 – a clear breach of the law. Bundesbank President Jens Weidmann, is reported to have said that the gold bar list is kept secret and any demands on the New York Federal Reserve bank would ‘endanger the trust between alliance bank and the Fed.’

Untouchable gold

When Germany’s economy minister Philip Roesler, was asked why Germany’s gold reserves couldn’t be used to boost the Eurozone’s bailout funds he responded by saying the country’s gold must remain ‘untouchable’ perhaps he hadn’t realised just quite how untouchable.

But why the worry about the country’s gold now? Why have the Federal Audit Office only just started asking questions as to where the country’s gold is?

In 2009, the ECB’s director of market operations stated “there are four ideas behind those gold holdings [of the Eurozone]: The economic security; the capacity to face unexpected needs; the question of confidence; and the risk diversification issue.” So have one of these issues now become relevant?

Gold possession

Many are commenting online as to what the countries’ motives are for (almost) making such a move. Some question if it’s because they don’t trust the US government for keeping the gold where they say it is, or if it is there, how do they know it’s theirs?

Charles de Gaulle famously sent air freight carriers, between 1962 and 1966, to New York to collect France’s $3 billion worth gold. President de Gaulle wanted the gold back because he did not trust the US government’s motives in the monetary system. The Frenchman wanted an international monetary system which did not “bear the stamp of any country in particular.”

One man very close to the American government also doesn’t believe the gold is there – Congressman Ron Paul. In 2011 he a sponsored a new Bill, ‘The Gold Reserve Transparency Act of 2011’ in the hope of directing the Treasury to ‘conduct a full assay, inventory, and audit of federal gold reserves, including an analysis of the sufficiency of the measures taken for their security.’ But once again, if governments don’t see a role for gold, as Keynesian economics states, then why worry if it is there or not?

Weak dollar, strong gold

The other concern is obviously the weakness of the US dollar, particularly with the increasing amounts of QE alongside record levels of low interest rates. The US’ s sovereign debt downgrade last summer and the rumoured new plan ‘reverse repo’ or its MOPE plan (Management of Perspective Economics), have most likely got other countries asking if the Americans really have got this under control.

Warren Buffet recently explained to investors that the dollar has lost between 80-90% of its value in the last 30-50 years. Inflation figures, according to Congressman Ron Paul last week, sit at 9%, day after day the US dollar loses value, and Americans are feeling it. It’s an election year, with several of the GOP candidates calling for a review into the use of gold in the monetary system. That extra gold in the US’s vaults could come in very handy.

Other reasons for the growing concerns for Germany’s gold are due to the fact that they are effectively backing the Euro. Should the ECB and Euro collapse, the gold, held by the US, could easily transfer into US ownership as collateral for the previously agreed dollar swap arrangements with the ECB. The World Gold Council has long cited the euro area sovereign debt crisis as the reason for the net gold buying activities by Central Banks, but this may not be much use if your gold isn’t in your own vault.

Believe in gold

Whatever the reason for Germany’s new found interest in its gold it goes to show that the security gold offers us, is a feeling intrinsic to us all. The thought of a country losing its gold feels like a threat to national security – unsurprising as this is a common event during warfare.

Throughout years of economic lessons I was taught that gold no longer circulates as money due to the restrictions it places on the central banks when it would like to inflate the money supply. We were basically taught that the Central bank would be a much more successful steward of our monetary system than something which has successfully been in the job for two thousand years. So why do governments even keep gold?

The possession of gold implies that central bankers and governments are unable to fully support the idea that treasury bills and bonds, or the value of the PIIGS’ sovereign debt really are of any value to a country’s monetary system. It seems as though those at the top have forgotten the serious lesson of mainstream neoclassical economics – gold is of little use to a country (apparently).

Or have they purposefully forgotten this? Have they now realised that gold is safer than fiat money, or a country is trusted if it holds gold, or a country is seen as more reliable should it hold gold? Most of all, they seem to have purposefully forgotten that a gold backed monetary system is a barbarous relic. Economists from the Austrian school are having a good laugh…

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