Gold reserves as collateral

2012-MAY-30

Yesterday’s big news as far as gold was concerned was a Telegraph report stating that Germany could be about to get into the “cash for gold” business in a big way. Angela Merkel is said to be increasingly favourable to the idea of countries pooling a portion of their sovereign debt into a redemption fund, with the eurozone then taking on a collective obligation to honour this debt. Member states would be obliged to pledge gold and currency reserves as collateral in case they are unable to make good on their obligations.

This so-called “European Redemption Pact” gets around German courts' constitutional objections to “Eurobonds”. It would also allow PIIGS governments to in effect share “Germany’s credit card”, thus lowering borrowing costs in the eurozone periphery and so taking the pressure off of embattled governments in Spain, Greece, Italy and elsewhere. And a big plus point as far as Germany is concerned is that this is no free lunch: if countries cannot honour their commitments, then they will lose their collateral.

But of course, things are never as simple as that. The fly in the ointment here is the always-emotive subject of gold, with many in southern Europe sure to object to the idea of pledging their gold to such a venture. Italy’s sovereign gold reserves stand at 2,451 tonnes – worth €98 billion as of March – while France sits on a hoard of 2,435 tonnes, and Portugal 383 tonnes (Portugal actually owns around 72 tonnes more then the European Union’s second largest economy, the United Kingdom). Having thus far resisted pressure to sell gold in order to shore up state finances, many in these countries will no doubt be wary of this EU take on a “cash for gold” shopping mall kiosk.

This idea bears close attention. If it looks like taking off, it will be yet another indicator that gold is slowly but surely re-entering the financial calculations of governments around the world.