Germany wants its gold back.
The German central bank, the Bundesbank, is laying out plans to bring a big chunk of the gold it has stored overseas back to Berlin.
That’s a lot of gold. In absolute terms, only the US owns more gold than Germany.
Why does this matter? Well, for one thing, it suggests the Bundesbank doesn’t trust other central banks to look after the country’s gold.
But perhaps more importantly, it rather suggests that Germany has serious doubts about the ability of the euro to hold its value.
As we’ve pointed out before, there have been long-standing concerns about the integrity of the gold market.
One theory held by pressure groups such as GATA (Gold Anti-Trust Action Committee) is that central banks have been trying to suppress the price of gold, largely to conceal just how bankrupt the ‘fiat’ monetary system is.
They have done this by secretly lending their stock to the market. This means that much of the stated physical stock of gold consists of paper claims to the gold, not the gold itself. In other words, there’s a lot of double-counting going on.
GATA argues that there have been so many covert sales that the major vaults would find it impossible to cope with a sudden outflow of gold. Viewed from this perspective, Germany’s action could be seen as an attempt to get ahead of any possible run on the vaults.
This story would certainly make a good thriller. It also fits with Germany’s recent behaviour, which has included testing the purity of some of its overseas holdings.
However, like all such conspiracy theories, it’s hard to either prove or disprove.
Moreover, there’s a simpler explanation. German voters are worried that the euro is about to experience a drop in value. And the Bundesbank seems to agree with that view. So it wants to be sure that the country’s hard assets are under its direct control.
In this context, it’s particularly interesting that the Bundesbank is taking back every single one of the 374 tonnes of gold it has stored at the French central bank.
It’s also taking about 300 tonnes back from the US, but it’ll still have around 1,200 tonnes stored there. And Germany will still have some gold left at the Bank of England.
Sure, both the Federal Reserve and the Bank of England are “near gold trading centres” as the FT puts it. But we don’t think it’s too much of a wild speculation to suggest that in the event of a euro break-up, Germans would feel much more jumpy about France holding a chunk of their gold hostage, than the US or the UK.
Now we don’t expect the euro to break up entirely – certainly not in the short-to-medium term. But it could get a lot weaker from here.
Despite all the optimistic statements from the likes of the European Central Bank (ECB) and others this year, the truth is that the economic outlook for the eurozone is poor. While the area is currently running a trade surplus (it exports more than it imports), surveys suggest that exporters expect things to get worse.
Even Germany is having a tough time. Ben May of Capital Economics points out that domestic demand is getting weaker, while trade is likely to reduce, rather than boost, growth in 2013. Overall, he thinks the German economy will contract by 0.5% this year.
That’s all bad enough. But a bigger worry is the politics of the eurozone. The coming Italian election next month is a real wildcard. Italy’s current leader Mario Monti may hold out hopes of leading a government of national unity, but this now looks increasingly unlikely.
Instead, the big choice is now between the populist Silvio Berlusconi and a coalition of left-wing parties. Both groups are anti-reform, and victory for either could see markets lose faith in Italy once again.
Meanwhile, Germany seems to be finally taking a tougher line on bailing out other countries. For the past year, the approach has been for Angela Merkel to talk tough, then finally allow just enough aid through to delay disaster until later.
However, for the first time, pressure from all parties has forced Merkel to refuse the latest casualty, Cyprus, an immediate bail-out. This is now likely to be delayed until March at the earliest.
With economic pressure increasing, and the potential for nasty political surprises, the ECB may end up having to step in once again. If it has to make good on its promise to do ‘whatever it takes’, then this would hit the value of the euro.
One way, of course, is to do what the Germans are doing, and get yourself some gold. My colleague Dominic Frisby looked at the current state of the gold market in yesterday’s Money Morning: Every gold investor should watch these numbers like a hawk.
Contributing Writer, Money Morning
Publisher’s Note: This article first appeared in MoneyWeek
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