Time for Eurozone to Reach for the Gold Reserves? Not at these prices, maybe at €4000

There is a very interesting story out of the FT today all about how the Eurozone countries should sell their gold to help pay off their enormous debts.

The issue at stake revolves around the estimated 10,000 tonnes of gold reserves that are currently held by eurozone governments. According to the Council, “it is well known that some of the countries most affected by the crisis, including Portugal and Italy, are responsible for a significant proportion of these assets.”

Unsurprisingly, this situation has prompted some to suggest that governments should sell some of that gold. The value of gold has soared in the last few years, and if there were ever a time that eurozone countries needed an unexpected windfall – say, to pay interest on bonds – it would be now.

But the Gold Council, for its part, insists this would be a mistake. For quite apart from the fact that a massive dump of gold would dampen the price, eurozone debt woes are now so large that gold sales would only scratch the surface of the problem. Or as it notes: “The gold holdings of the crisis-hit eurozone countries (Portugal, Spain, Greece, Ireland and Italy) represent only 3.3 per cent of the combined outstanding debt of their central governments.”

[emphasis ours]

And there you have it folks, the debts are now so massive across Europe that at these gold prices it doesn’t even amount to a rounding error in the debt.

In fact even if gold were to trade at €13,200 (we’re currently at €1320) that would still only cover 30 odd percent of the Euro-debt. In short there is no way that the European countries with large gold holdings, like Italy and Portugal, would sell at these prices because it wouldn’t make any difference to the problem.

However, should we get a dramatic rise in the value of gold then this will probably change. In fact it would seem sensible for countries like Italy and Portugal to be crying out for a dramatic rise in gold to allow them to more easily pay down some debt. But the levels we’re talking about are much, much higher than where we are now – something more like €4000  (which would cover 10% of the debt) and then this gold option should be seriously considered. But until that happens we just can’t see European countries being so stupid…

But it certainly wouldn’t be the first time that a government has done something out of pure stupidity, and if they were silly enough to sell gold down at these levels then we’re sure the likes of Russia and China would be there to snap up each and every ounce.

Related posts:

1. Gold and the Eurozone Crisis
2. Gold favoured as Mervyn King warns of “exceptionally threatening” risks from the eurozone
3. In Uncertain Times, Reach for Certainty
4. Germany’s economy is only king in the blind valley of the Eurozone
5. Gold prices hit new all time highs

Link to this article: : http://www.goldmadesimplenews.com/analysis/time-for-eurozone-to-reach-for-the-gold-reserves-not-at-these-prices-maybe-at-e4000-7796/

Posted by Thomas Paterson on Aug 31 2012. Filed under Analysis. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.