EDITOR: | January 20th, 2013

Gold – The Central Banks Fall Out

| January 20, 2013 | No Comments

Gold bar imagesThe great, the not so great, the good and the not so good, are all headed to the World Economic Forum in Davos Switzerland this week, for the annual junket where they try fixing the agenda for the coming year. This year more than most, they are spoiled for choice. Topping this year’s agenda will probably be the recent events in Mali and Algeria. Exactly how much of a threat to Europe’s natural gas supply is al-Qaeda in the Maghreb breakaway group the Masked Brigade, also known as Witnesses in Blood? How much of a threat exists that much of North Africa will slide into anarchic chaos as the rest of the decade  plays out?  The recent developments being so new, few if any attending, will have much in the way of an answer.

Next on the agenda is likely to be the chaotic state of Europe and America, where each in their own way are tossing lit matches at a petrol leak. In Europe a never ending series of “great leaders summits,” has produced a never ending series of “euro fixes” that never quite fix the problem at hand, but quickly present a new worse problem. All that’s happened so far has been the impoverishment of most Greeks who’re not shipping magnates, and in forcing youth unemployment in Club Med up as high as 56% in Spain. In France, Italy, Spain and Portugal, youth unemployment runs 30% to 56%, an entirely unstable situation that will likely end in social despair and social disorder.

In America the political class has declared war on each other. Today President Obama takes the oath of office for his second term. Tomorrow he does the whole thing over again for the benefit of the public and the media. Talk about Nero fiddling while Rome burns. Having avoided the year end fiscal cliff by raising taxes, closing a few tax loopholes and generating a few new ones, America is now heading towards a massive fight over where to cut spending and by how much.

The issue is of critical importance. It took America 200 years, a civil war, two world wars, the Vietnam war, and President Carter, to get America’s national debt up to 900 billion in 1980. It took Presidents Reagan, two Bushes, Clinton and Obama, to get it up to 16.4 trillion where it is today. 102 percent of US GDP. But 16.4 trillion is already out of date. If America’s debt ceiling isn’t raised and soon, America’s federal government is going to have to start living within its tax revenue. It won’t be able to borrow more to fund all of its spending. While the tax revenue is more than sufficient to continue paying the interest on the debt, it isn’t sufficient to pay for everything else. Nearly two years ago, S&P downgraded America from its triple-A rating, citing political unwillingness to address and fix its unsustainable rising debt problem. That problem of gridlock is far greater now.

Not that the debt problem is solely America’s. Great Britain is all too likely to lose its triple-A rating this year, due to rising unsustainable debt. The Eurozone is a basket case likely to break up this year. Old socialist France is busy raising taxes and making war on its businesses and entrepreneurs even as France heads into recession. As I said at the start, this year’s ritzy gathering is spoiled for choice.

But it is Germany that has just tossed in the biggest hand grenade of all. Last week they lost faith in the central banks of America and France. To quote from the Wall Street Journal:

The Deutsche Bundesbank, holder of the world’s second-largest gold reserves after the U.S., said that by 2020 it hopes to have half of the country’s 3,400 tons of gold stored in Germany, compared with only 31% now.

Starting this year, the Bundesbank will remove 300 metric tons of gold from the New York Fed, representing 8% of the total it keeps there. The Bundesbank will also repatriate all of the 374 tons of gold it has kept on deposit at the French central bank. The gold transported has a current market value of €27 billion ($36 billion), the German central bank said.

The Bundesbank long ago lost faith in the UK’s Bank of England, repatriating half of  its London held gold in the early 2000s, after the UK’s disastrous then Chancellor and last Prime Minister, sold off half the UK’s gold reserves at what turned out to be the post 1980 gold low. It has now lost faith in the Federal Reserve and Bank of France. We know from two resignations last year that the Bundesbank has already lost faith in the Italian run European Central Bank, over their bailout policy.

Stay long physical precious metals. Though they won’t come out and say so in public, Germany and the Bundesbank now clearly fear for the continuance of the fiat dollar reserve standard. My guess is that this will be one of the hottest topics at the year’s party in the snow. The Keynesian line will be that it doesn’t matter, gold’s not money and everything fine, well and good. The Hayekian line will be, who are you going to believe, the spendthrift Keynesians or your own eyes.



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