Tag Archives: foreign exchange reserves

Between Gold & a Hard Place.

2011 will be remembered as the year when the gold price really took off. It will also be remembered as the year of the PIIGS.

That’s Portugal, Italy, Ireland, Greece, Spain.

So what would happen if we combined the two? What would happen if the PIIGS decided to sell their gold in order to clear their debt? (As recently suggested by Germany’s Vice Chancellor).

And while we’re at it,  let’s get away from expressing sovereign debt in percentages of GDP. No-one understands that anyway.

Let’s be different and look at it all in cash terms:

The total gold holding of the PIIGS is about 3250 tonnes. At current prices that’s worth about 132 billion euros. That’s 132,000,000,000 euros.

Unfortunately their combined outstanding sovereign debt is about 3,300 billion euros. That’s 3,300,000,000,000 euros

For instance, Portugal has about 390 tonnes of gold, currently worth about 15 billion euros.  That is about 20% of its latest bailout package.

The biggest Eurozone gold hoarder is Italy. It is also the world’s fourth-largest owner of the metal . Italy’s  2,450 tonnes is worth about 95 billion euros at today’s prices. That’s 95,000,000,000 euros.

Italy’s government has $2.45 trillion dollars in debt. That’s 2,450,000,000,000 euros.

It is estimated that as a result of inevitable defaults, banks will LOSE £200 billion euros. That’s 200,000,000,000.

Hence all that nervousness around bank shares.

It’s all theoretical anyway because gold is not the property of the PIIGS’ governments to sell. Gold is part of a country’s Foreign Exchange Reserves which are managed by central banks and cannot be used to finance the public sector – except apparently, in certain Middle Eastern states.

What a mess!

Finally, in case you’re still wondering why the politicians have not actually put into place a plan to sort-out the debt-related issues, it is because they don’t really know what to do. Plus, they are playing the NOMW game.

NOMW? Not On My Watch.

President Sarkozy has an election to fight in 2012 and Bundeskanzlerin Merkel has one in 2013.

Can they possibly keep it all going until then?

No.