From the Guardian.co.uk
A solution to the eurozone crisis is staring European leaders in the face. Remarkably, they have failed to consider gold as the asset of last resort. Eurozone member nations and the European financial stability facility (EFSF), the bailout fund, could use gold to back new bond issues.
The security of gold-backed bonds would encourage investors. Indeed, central banks purchased 4.8m ounces of gold worth $8bn (£5bn) in the third quarter. The application of gold backing would allow stricken nations such as Greece, Portugal, Spain and Ireland to depart from the restrictive eurozone and the accompanying depressive austerity policies, if they wished. The bonds would give them time to devalue, adjust and grow again, and also isolate the crisis from other European nations.
As at the end of October, eurozone nation central banks owned 347m ounces of gold worth $604bn. This compares with 400.5m ounces, then worth only $110.5bn, in the first quarter of 2000. The gold reserves fell because European central banks subsequently sold gold at knockdown prices of $250 to $350 an ounce after the 11 September terror attacks. Since then the lemming instinct of European finance ministers and central banks has once again prevailed and their gold sales have dried up, despite recent record prices of $1,800-1,900 an ounce.
Fortunately for eurozone leaders and their advisers, there is still a lot of gold left in the kitty. The current market value of the eurozone's 347m ounces has surged to $604bn, or €447bn – more than the current capital of the EFSF…
Eurozone leaders have devised several complicated partial loss guarantee schemes to persuade China and other potential investors to invest in EFSF bonds. Hardly surprising that the response has been: "Thanks, but no thanks." On the other hand, if EFSF bond issues had the backing of gold plus interest, it would be surprising if European and international investors didn't snap them up. Depending on demand, gold backing could be 25% to 50% of the total value of an Italian bond, for example.
Gold backed bonds have worked before. Take some precedents. In 1981 and 1982, South Africa, which was then the world's largest gold producer, swapped nearly 5m ounces of gold collateral in return for foreign exchange. In the late 1970s and early 1980s, indebted nations such as Brazil, Uruguay and Portugal either swapped or sold their gold to raise funds. In 1973, France issued 'Giscard' bonds, indexed to the price of gold.
While I think bonds collateralized by gold could indeed be tapped, I don’t think this would work like a magical wand that could wish away the debt crisis, where crisis afflicted EU governments can just “depart from the restrictive Eurozone”, elude “depressive austerity policies”, or “to devalue”. That would be oversimplistic and naïve.
Growth of Social Transfers (From Faz community) [hat tip Prof. Antony Mueller]
The Eurozone has been blighted by insolvency issues, mostly emanating from an overextended welfare and heavily regulated state which has been compounded by a debt overdosed dysfunctional banking system.
EU’s gold holdings would signify only a fraction of EU’s debts.
The US and Japan has not been immune to the same crisis, except that the EU has been the first to feel the crunch from an unsustainable political economic system.
Growth of government debt (From Faz community)
Gold backed bonds does nothing to change this dynamic, except to possibly gain access to funding in the marketplace which may help the EU to mitigate current conditions as reform programs are undertaken.
Nevertheless, the good news is that the urgency to address the current dire situation from the fiat money based debt mess has been prompting mainstream media to reconsider gold as part of the possible solution. Such is the gradual transformation of gold from an ignored “barbaric metal” to eventually “money”.
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