Where is Greece’s gold?

Alasdair Macleod – 03 March 2012

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.

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FinanceAndEconomics

Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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