GoldGold

Germany’s current efforts to move their physical gold reserves have caused some speculation as to why?

Now Germany is far from the only country that in later years has exhibited some interest as to the whereabouts of their nest egg.

The physical storage of a gold reserve is generally for practical reasons f.i. in the event of war, where it just might not be a good idea in the event of war to let the enemy lift your wallet with an occupation. Before WW2 Spain moved their reserves to the Soviet Union – an even worse idea. During WW2 Denmark’s ambassador Kaufmann helped himself to the gold reserve stored in Fort Knox to pay for supplies to the Danish resistance (something that definitely was not official policy – Foreign Office was severely ticked off – and led to the general order each Danish soldier has to know by heart: Orders from captivated authorities are not to be obeyed).

One thing is that gold prices – along with all other commodity prices have seen absolutely bizarre movements over the last 10 years. Probably that is mainly due to China. At present the price is about 5 times what is was 10 years ago – and had been a long time before that.

Central banks hold about 20% of all gold (taken from Wikipedia – so it might not be accurate to the 19th decimal – but close enough for our purposes) and jewellery and speculators (“investors”) have about ¾. Though wedding rings have been known to come off at parties – that is hardly sufficient to shatter the world’s financial institutions – wobbly as they may be. As far as gold is concerned the situation is firmly in the hands of the CB’s.

CB's Gold Chart

The big CB hoards are the USA and the Euro-countries (especially Germany). China and Russia are insignificant and the rest of the world is simply too spread out to be of importance.

One of the reasons gold has become dearer is the abysmal deposit rate in Chinese banks which is close to 0% with a raging inflation – though it doesn’t explain all the other commodities.

But again when Germany starts shifting coins from one pocket to another one should think as to why. The official explanations as to why this enterprise has been undertaken have been far from convincing. Taking inventory could have been done easier and with a radioactive marking of the bullion pilfering could not only be prevented, but traced.

China has been playing the currency market (with varying to scant success). A drastic change in gold prices is not likely to affect the Western countries to any great extend as the part gold constitutes of their currency reserve is definitely minor – and mainly due to historical reasons and old superstitions.

Gold Price Average Chart

Both the US and EU has gold enough to shatter the market before lunch any day – it is a constant threat to the Chinese savers, as a major sale would ruin them. Not only that but as panic spreads it would bring about a massive inflation in China, as “investors” would be buying just about anything at any price just to rescue some of their savings. It could be a reminder to the Chinese that they should behave responsibly – and any attempts to destabilise either the USD or the EUR by selling off largish quantities of sovereign bonds could be countered immediately with a massive sale of gold at a discount.

As both the US and the EU have the means to wreck havoc in China it is indeed a bad idea to play the USD against the EUR. In a “gold war” the relation between the two is likely to be unaffected, but will bring about massive inflation in China – an inflation the Chinese economy probably wouldn’t survive.

Another possibility is that Chinese trade with Iran, which is probably on a gold base, circumventing the embargo on Iran, can at any moment be destroyed making the Iranian oil prices skyrocket if the bottom was kicked out of the gold price.

The Chinese aggression against Japan has been noted – and in case it starts getting out of hand, there are relatively painless options available to make it a very good idea for China to stop. Reminding China of just how frail their position really is might be one of them.

There are as we have seen more than one reason for bringing the Western duck in a row – and drilling them.