ECB Doesn’t Rule Out “PIIGS” Gold as Collateral for Gold Backed Eurobonds, Sends Gold Soaring

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ECB Doesn’t Rule Out “PIIGS” Gold as Collateral for Gold Backed Eurobonds

Gold and the Swiss franc are higher today as risk aversion has returned with global stock markets falling on concerns the US employment figure later today will disappoint and confirm that the US economy continues to weaken.

Gold is trading at USD 1,853.50, EUR 1,300.10 , GBP 1,143.30, CHF 1,446.50 and JPY 142,320 per ounce.


Cross Currency Table

Gold’s London AM fix this morning was USD 1,854.00, EUR 1,301.23, GBP 1,143.81 per ounce. The gold fix was higher than yesterday’s in all currencies - USD 1,815.50, EUR 1,270.73, GBP 1,118.95 per ounce.

Today, the President of the ECB, Jean- Claude Trichet did not rule out a gold backed euro bond in an interview with ‘Il Sole 24 Ore’ published on the ECB’s website.

The comments were a response to former Italian Prime Minister Romano Prodi who proposed - in Italian national daily business newspaper ‘Il Sole 24 Ore’ last week - the creation of a euro bond backed by member states’ gold reserves.

Prodi was President of the European Commission from 1999 to 2004.

Trichet was asked about “the creation of a fund guaranteed by the gold reserves of countries that would issue bonds to buy back national debt and make new investments.”

Trichet did not answer the question directly but said “at this stage, we have the EFSF bonds, which are bonds with a European signature. The main message of the ECB Governing Council to governments is to implement rapidly, fully, comprehensively the decisions taken by the European heads of state and government on 21 July.”

Reuters reported today in an article entitled ‘Gold sales would not solve Europe’s debt troubles’ that “Europe’s most indebted nations are under heavy pressure from their richer neighbours to sort out their finances, but they are unlikely to mimic the impoverished gentlefolk of old by selling off the family silver — or in their case, gold – to do so.”

Reuters recount how senior German lawmakers and politicians have advocated so called ‘PIIGS’ nations sell their gold to fund “bailouts”.
 
Reuters says that the “demands ignore the fact that this gold is not the property of the PIIGS' governments to sell.”

"Foreign exchange reserves are held and managed by central banks, not by governments," said Natalie Dempster, director of government affairs at the World Gold Council. "Forex reserves are set aside for specific purposes - defence of currency, payment of external debt obligations and payment of imports."

"In the past you could have had incidences where governments might try to overstimulate their economies by running exceptionally loose monetary policy before an election," she said. "That is a reason why it is critical, in an advanced economy, that central banks are independent”, said Dempster.

With regard to Prodi’s proposal to create a euro bond backed by member states' gold reserves, Reuters said such proposals remain little explored according to analysts.

GFMS' Klapwijk said that "it has slightly surprised me that some of them haven't looked harder at some creative uses of gold in terms of gold-backed bonds, which might be a useful way of trying to lower the cost of borrowing."

"But again, they come up against the fact that the scale of the borrowing required is so large that there are probably other ways of trying to deal with the problem rather than using gold. That would probably be a drop in the bucket."

Separately the Central Bank of Ireland has said that it will not disclose whether the gold reserves of Ireland (a paltry 6 tonnes) have been swapped or loaned out or had any other receivable status recorded against them (see Commentary below).

A senior administrative officer for financial control at the Central Bank of Ireland responded to an inquiry regarding the custody and ownership of Ireland’s gold reserves: “The bank is not, however, in a position to provide further information, nor to outline its investment strategy in relation to the gold holdings.”


G10 Currencies and Gold – 1 Year Performance

Gold’s lack of counter party and debasement risk and its safe haven status is resulting in it being slowly remonetised in the global financial and monetary system.

Gold’s status as a finite monetary reserve makes it ideal collateral today especially with the risk of contagion in the Eurozone and wider global financial system. 

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NEWS
(Reuters) -- Gold sales would not solve Europe's debt troubles
http://in.reuters.com/article/2011/09/02/idINIndia-59110820110902
 

(Bloomberg) -- Gold Society in Hong Kong Says Trade Volume Doubled in August
http://www.bloomberg.com/news/2011-09-02/gold-society-in-hong-kong-says-trade-volume-doubled-in-august.html
 

(Reuters) -- Gold flat ahead of U.S. payrolls data
http://www.reuters.com/article/2011/09/02/us-markets-precious-idUSTRE7781Q420110902

(Your Money Site) -- Citigroup Global: Gold to reign in bull camp, $2,500 by year end
http://www.yourmoneysite.com/news/2011/sep/citigroup-global-gold-to-reign-in-bull-camp-eyeing-slippage-in-oil.html

(CNN) -- Gold wedding bands get dumped for tungsten
http://money.cnn.com/2011/09/01/news/economy/wedding_ring_prices/index.htm?iid=HP_River

(CNBC) -- How the Gold Business Operates
http://www.cnbc.com/id/43974868

COMMENTARY

(Financial Times) -- Phantom gold haunts GLD vault tour
http://www.ft.com/intl/cms/s/0/d90e9d80-d4ac-11e0-a7ac-00144feab49a.html#axzz1WgoizGjg

(London Bullion Market Association) -- Adding Gold to Europe’s Liquidity Buffers
http://www.lbma.org.uk/assets/Alch6205Dempster.pdf

(London Bullion Market Association) -- The Real Price of Gold
http://www.lbma.org.uk/assets/The_Real_Price_of_Gold.pdf

(GATA) Cromwell must be laughing over Ireland's forfeited gold
http://gata.org/node/10371

(The Irish Times) – Rory Gillen: Gold is like Irish housing in 2003 - overpriced, rising and a risky bet
http://www.irishtimes.com/newspaper/finance/2011/0902/1224303346122.html

(The Irish Times) -- Prudent Financial Planners Advocate Importance of Having an Allocation to Gold
http://www.irishtimes.com/newspaper/finance/2011/0902/1224303346113.html

(The Telegraph) -- When debt levels turn cancerous
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100011744/when-debt-levels-turn-cancerous/

(Financial Times) -- Get used to world without ‘risk free’ rate
http://www.ft.com/intl/cms/s/0/52a9169e-d4b6-11e0-a7ac-00144feab49a.html#axzz1WgoizGjg