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Recently
there have been reports that if Greece defaults on the new bail-out package,
creditors will be entitled to seize her gold. Whether or not this is true, it
raises one big question: given the severe financial and economic crisis in
Europe, what is the current collective attitude of the eurozone
central banks to gold?
Bear in
mind that these central banks sought to end any monetary role for gold after
the Bretton Woods system fell apart in the early 1970s. More recently, as
signatories to the three consecutive Central Bank Gold Agreements, they have
perhaps seen gold as a source of funds as well. But those were “happier
times” for them, when progressively greater central planning and
increased regulation went unchallenged by the markets. But now that monetary
authorities are facing increasing criticism, the central banks’
strategy towards gold today must logically be completely different: either
gold is an asset whose value has to be maximised as
collateral, or it has to be held on to as a “last resort” asset.
Vested interests have fundamentally altered with the change in circumstances
now forced upon eurozone governments.
The rise in
gold prices to current levels underlines the point. Based on official
figures, the eurozone’s share of official
gold holdings as a proportion of the total global stock has fallen from 9%
when the euro was introduced to only 6% today. Furthermore, an unknown
quantity of this gold is held at non-eurozone
central banks, particularly the Federal Reserve, Bank of England and the Bank
for International Settlements, in sight accounts. With a sight account, the
depositing central bank merely has a counterparty claim on its gold deposits,
which allows the Fed or BoE for example, to sell, swap or lease the deposited
gold as it sees fit: sight accounts are simply a means for a central bank to
expand the apparent supply of gold in the same way a commercial bank expands
bank credit.
The ability
to create gold through the sight account system has been fundamental to
bullion market liquidity in the major trading centres
since the Second World War. Problems will arise when confidence in the system
is questioned: for example, how much of Greece’s gold actually exists,
and what has happened to any gold Greece transferred to the European Central
Bank as its joining fee? This question is suddenly relevant to all central
banks, not just the 17 euro-area members. We don’t know if this was in
Hugo Chavez’s mind when he demanded the repatriation of
Venezuela’s gold, but it may well have been.
The subject has also been raised by investigative journalist, Lars Schall, with respect to Germany’s reserves at the
New York Fed.
As central
bankers mull the point over they may well conclude that among all their
troubles there is one more that must be avoided at all costs: the possibility
of a gold run by the smaller central banks on their larger peers in the major
bullion trading centres. It would be a consequence
of the deepening crisis involving fiat money and credit, and if this is
allowed to occur all confidence in paper money
itself would be at risk.
Article
originally published at Goldmoney.com
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