What to do as the Germans secretly prepare to print euros
Matthew Partridge Nov 02, 2012
Sometimes the biggest stories are not the ones that get the most coverage. Not long ago I noticed an interesting item in the news. While it hasn’t made the headlines, it could have a big impact on markets – especially the gold price.
The central bank plot to keep gold prices down
As we noted in July, there’s a group of people known as the Gold Anti-Trust Association (GATA) who believe that the world’s central banks have been working to push down the price of gold, both to protect banks from a bad bet against gold prices and to disguise the inflationary effect of monetary policies. While the primary focus is on official sales, Marshall Auerback of Madison Street Partners believes that this might not tell the whole story.
He argues that it is possible that central banks may be sneaking gold from their vaults onto the market, either through surreptitious sales or leasing operations. This means that the true levels of physical reserves are lower than the reported figures.
The obvious implication is that if this were widely known, central banks would be forced to buy a huge amount of gold to cover the gap, otherwise this would lead to panic among gold depositors. This would almost certainly drive up the price, which the banks clearly want to avoid.
Of course, the latter allegation is currently unprovable one way or the other. Indeed, the only way to find out for sure whether this has any basis in reality is for the vaults themselves to be physically audited. This is clearly impossible for outside organisations as security restrictions mean that the only people who could request such an inspection are the owners of the bullion.
What is the Bundesbank up to?
The problem is that no major government has tried to exercise its right. You can understand why this is, since the process is time-consuming and expensive, and up until now, the idea of ‘missing gold’ has been viewed as a fringe concern.
However, the German Bundesbank has shocked everyone by agreeing with the German Audit Court (a civil service body which makes recommendations on budgetary matters) to an audit of Germany’s gold reserves. Indeed, as the FT reports, for the gold held in Frankfurt, they have even invited journalists in to view the process.
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They’ve also taken action to check the large amounts of gold held abroad too. This was a bit more difficult. Initially the US Federal Reserve, which holds nearly half of Germany’s reserves, wasn’t happy about the idea of all the gold held being checked. However, after talks, a deal was agreed whereby 50 tons will be sent back to Germany every year for three years, and will be analysed in detail – which will involve melting it down to check its composition.
What are they worried about?
The amounts to be returned are very small in the context of Germany’s wider holdings. Indeed, the 150 tons that will be returned is less than 10% of the gold bars held in New York. This means that even if there is gold missing, it would be easy for the Fed to find enough to satisfy the Bundesbank’s demands.
Nonetheless, some argue that the fact that Germany is checking the gold at all is a sign that officials are starting to treat concerns about a gold shortfall seriously. Similarly, the Fed’s refusal to allow an immediate audit of all the reserves could be a sign that it has something to hide.
However, while we certainly can’t discount these theories altogether, they remain unproven. But this story does point to something of key importance to investors – Germany may be getting ready for a drop in the value of the euro.
How you should hedge this threat
As we’ve said before, there are only two ways out of the eurozone crisis. One is for the euro to break up or shed members. But, with the possible exception of a Greek exit, we don’t think Germany, a founding member of the eurozone, will let this happen no matter how many hardline threats it issues that suggest otherwise. It would rather, albeit reluctantly, sign off option two - massive money printing. That would hit the value of the euro just as it has sterling and the US dollar.
The Bundesbank’s decision to audit its gold reserves is a sure sign at the very least, that both Berlin and Frankfurt are worried. Gold (along with London property) is one of the assets of choice if you are hedging against a weakening currency. In that context, an audit of gold reserves smells to us like the kind of action a central bank would take just before a major announcement of euro quantitative easing (QE).
We therefore think that you should continue to buy gold. Indeed, Capital Economics thinks that a combination of fresh money printing and increased safe-haven demand will mean that “the price of gold will climb to new record highs of around $2,000 per ounce in the coming months”.
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