James Rickards and Max Keiser suggest one of the logical conclusions of the Italian-debt blowup is that Italian gold will be auctioned off, perhaps to China:
With Italian external debt standing at $2.2 trillion, and Italy’s 2,400 tonne gold holdings worth only $137 billion, gold would have to rise pretty significantly for that option to come into play.
Of course, these figures ram home the idea that gold is significantly undervalued relative to current credit/debt levels. America’s external debt stands at $14.3 trillion, yet its gold reserves are worth just less than $500 billion.
Officially, gold is not money. Officially, levels of debt should have no tie to gold reserves (i.e., the ability to pay in the 6,000-year old store of value).
But with the current malfunction in the global economic system, which soon may have to deal with the consequences of Euro breakdown, or an oil shock, or a new middle eastern war, it is perfectly plausible (or even likely) that the newer fiat monetary systems — all of which are subject to counter-party risk — will crumple, and bring the old currency — gold — back into play.
While a chance of systemic collapse remains, nobody will be keen to see their gold reserves sold off. Nations with less gold than their rivals — particularly China who have recently shown particular interest in converting their FX hoard into gold — will be keen to see the system live on for as long as possible (to cash out into physical assets and gold).
And that is the fundamental contention — the Eurozone wants to keep its gold, but fear the catastrophic impact of Euro-breakdown — and the Chinese want to keep the system going while slowly accumulating gold.
I can see that there is quite a lot of scope for a middle ground. The real question is how much would a Sino-European bailout-for-gold deal cause gold to spike…
all these sovereign crypto-bankruptcies are “virtual” – a “real” bankruptcy would effect in debtor’s gold (and any other assets, collateral) heading to French & German banks. the whole party is about dealing with debt “virtually” rather than “really”. China will have to find another way to suck gold in.
I wonder what Isreal is going to do when this all blows up – they officially have no gold reserves (at least I heard so). it would also look very unfortunate if it appeared they had some despite official denials, and Fort Knox turned out to be half-empty…
(normally I don’t like Jew-scapegoating but if they really have no gold, then sth is not right here…)
mantrid: I think you underestimate the strength of Keynesianism in the Jewish/Israeli intellectual community. The Israeli central bank sold their gold because they believed it a barbarous relic with no inherent value, and believed they were getting a good price in 1980 (in hindsight, they were — unlike Britain’s moronic Gordon Brown). Fortunately for the Jews, many Jewish investors are not half as stupid as that.
At the same time, Israel has relatively low gross and net external debt…
In fact, looking at the statistics one of the nations with the greatest to fear seems to be my home, the United Kingdom — very low gold reserves compared to external debt.
I’ve had >25% of my net worth in PM’s since 2005, and have never sold an ounce of gold (of course, I did unfortunately lose it all in a boating accident, but that’s another story…). Like other PM bulls, I’ve heard the country-by-country statistics on debt vs sovereign gold holdings used many times as the justification for expecting massive appreciation in gold prices in the future. I get that, and directionally feel it is the right way to think about things.
As someone who’s not very knowledgeable on global finance and the interrelationships between debt, money supply, PMs and bonds, I’d like to know the following: are you suggesting that there is a historical correlation between sovereign debt and the price of gold? In Mike Maloney’s debt collapse video on YouTube, in minutes 38:51 – 44:16 he makes a strong case for the price of gold historically being tied to the currency supply, which I understand to be different than the amount of sovereign debt a country has. Any thoughts?
The “price” of gold is the wrong way to look at it.
To see the underlying reality, we have to turn the whole thing on its head and look at the “price” of fiat in gold. As the fiat money supply (i.e. credit/debt) expands, gold does not increase proportionately, so — assuming demand for gold is relatively stable — while the fiat increases the gold will (generally although not always) buy considerably more fiat.
The exception is what we saw in the price of gold between 1981 and 2000 — a genuine boom in global productivity and wealth (“gold-denominated inflation”). The problem is, the boom (as often happens) turned to bubble in 2000-1, and since then we have gradually seen the price of real estate, food, commodities — when priced in gold — drop (gold-denominated deflation).
Essentially, this is because fiat currency is basically a policy tool used to make the money supply extremely flexible and so (by mass printing) prevent deflation (keep M2 stable) and so prevent debt-deflation and mass default.
Like most modernist interventionisms (many of which are largely beneficial) this practice has several negative side-effects (in medicine they call this “iatrogenic”) — in this case, debt can mount and mount unchecked. The modernist antidote to this is more expansion of the money supply so that the debt then makes up a significantly smaller proportion of the economy, and is once again manageable (that’s why Krugman, Yellen, Romer, Romer and Rogoff explicitly call for higher inflation and more money printing). The problem that I see is that high food and fuel inflation (a non-monetary real world problem due to high demand for food and fuel) will be significantly compounded by further money printing, even though headline inflation is low (due to credit contraction). The reality is that this will lead to lower disposable incomes, and more mortgage defaults, etc, not less.
So this is not so much a liquidity trap as a biflation trap. Print more money and it hurts the poor and elderly, don’t print more money and you hurt debtors, who start defaulting. But I am going off topic here.
So in any case, yes — there is an implicit relationship between money supply and the price of gold. And here’s recent empirical evidence for it:
A strong positive correlation between gold price, and M2.
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