Bruno Waterfield of the Telegraph takes us back to the troubled days in the midst of the Eurozone crisis:
At the height of the eurozone crisis, Mr Juncker was described as the "master of lies" for organising a meeting of finance ministers to talk about whether Greece could remain in the single currency and then trying to deny it was taking place. Germany's Suddeutsche Zeitung accused Mr Juncker of "taking the lead on the deception" and warned he had managed "to fritter away the last remaining trust the people of Europe still have".
Mr Juncker has never hidden his view that the compromises and deals being worked out in EU meetings or leaders or ministers need be protected from public scrutiny, by lies if necessary.
"When it becomes serious, you have to lie," he said.
It seems like such a long time ago when Spanish and Italian 10-year bonds were trading at rates close to 10% (they trade at 2% now) and Greece was threatening to tear the Eurozone apart by defaulting on its debt and returning to the Drachma. The Euro was on the brink and gold loved it as it closed in on $2000 per ounce. But that was all so long ago (a little over three years) and so much has changed.
Or has it?
The surprise rumblings Friday out of Austria about the desire to repatriate some or all of the country's gold reserves, made us think about why we're seeing all of these gold repatriation - and primarily in European countries.
We've covered a bit of this in a prior article, but just to rehash, the repatriation trend started with Germany (which failed miserably but that's a different discussion) in 2013. Over the last few months we've seen the Netherlands repatriate, the Swiss vote to repatriate and ban the central bank from gold sales (which is primarily why it failed not because people didn't want their gold at home), Belgium discuss the repatriation process, the ECB discuss buying financial assets including gold (which they of course later denied would happen), and France's leading opposition party request that the central bank audit and repatriate its gold. All of this is in the public domain - we can only speculate what goes on behind the scenes as most discussions of repatriation don't reach us until after the fact.
So far we've assumed that this increase in the desire of central banks to repatriate has to do with a lack of trust between central banks, and the desire to be able to audit reserves at will. We still think that's the case but there may be more to this as the requests to repatriate are primarily from European central banks.
Why European central banks? Do they know something we don't know?
The European Political Climate
As we take a deeper look into the political climate in Europe, investors shouldn't be fooled by the appearance of stability that one make assume based on ultra-low bond yields - there is much more risk than meets the eye.
The Greek stock market suffered its worst three day drop in close to 30 years as indexes tumbled and bond yields jumped. The anti-bailout party Syriza leads in the polls and it looks like Greece is going to need another bailout. The prior bailout wasn't smooth, but Goldman Sachs warns that, "In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged 'bank holiday'. And market fears for potential Euro-exit risks could rise at that point."
Turning to Italy, this is what was happening in Italy on Friday:
Source: Russia Today
Hardly calm as a mass strike and clashes with police, capped off a chaotic week as thousands of Italians protested reforms by Prime Minister Matteo Renzi. Renzi claims these reforms are necessary to improve Italian competitiveness, but realistically they are meant to appease Brussels as the European Commission and German Chancellor Angela Merkel have pressured Italy to meet its debt and deficit targets much faster. This is while the populist Five Star Movement gains support and has recently called for a referendum in early 2015 (they aim to collect 4 million signatures) to leave the Euro "as fast as possible".
In France, President Hollande's poll numbers dropped to a 26 percent approval rating, which sets a historical record for unpopularity in France. Who is becoming more popular? The far right Front National, led by Marine Le Pen, is now leading French polls with more than double the votes that Hollande would get. Le Pen is a critic of the Euro, and believes that if the Euro doesn't meet French needs then France should simply leave - that would leave Germany holding quite a bag.
We could go on about the depression faced in Portugal, the political chaos in Spain, and much more that we're seeing in terms of social unrest and a desire for change by the people of Europe - but I think readers get the point. Europe is not recovering and we're going to see quite a bit of instability and change in 2015 and 2016 - this is not an environment which should embolden and investor to seek 2% yields in European periphery nations (and negative ones in Germany!).
Finally, investors need to remember that unlike the US Dollar, the Euro is dependent on the cooperation of these many nations - the more political uncertainty and unrest the less cooperation. More importantly, as we see stronger populist leaders emerge in Europe, there will be more friction between EU nations as each nation calls for policy that benefits its own interests - at the expense of the interests of others.
Investors should remember that an exit of France, Italy, Spain, or even possibly Greece could break-up the whole Euro system. That was the fear in 2011, and really nothing has changed other than debt-to-GDP levels have increased and the economies have sputtered. The EU policy-makers will never admit this as they will first deny that anybody will exit, and if that happens, they will deny that it will have any impact on the Euro. But then again, we also remember the immortal words of Jean-Claude Juncker that "when it becomes serious you have to lie."
Follow What They Do - Not What They Say
Returning to the recent rush to repatriate that seems to be occurring with the European central banks - are they losing confidence in the Euro?
It is all speculation at this point, but it will always be speculation until it happens as investors will be the last ones to know - just as they were the last ones to know when the Mexican Peso was devalued (the government denied it would happen until it did), the Argentinean default (we're seeing déjà vu here), the Bear Stearns collapse, and more recently the Cyprus "bank holiday". The point here is that investors that believed policy makers despite signs to the contrary, lost most or all of their money - by the time the crisis is publicly admitted it is already too late.
Is this what we're seeing in the repatriation of European central banks?
We think that central bankers are feeling much less confident in the Euro and are moving to take control of their gold reserves and bring them home in case of a Euro break-up. After all, you have much more bargaining power if you have total control of your gold reserves and aren't dependent on another country (even a friendly country) to vouch for your gold holdings.
Look no further than German attempts to repatriate its own gold from abroad - to this date the country has been unable to repatriate even 10% of the amount they originally intended to bring home. All kinds of excuses were given about why it would originally take 7 years (seriously?) to bring home the gold, but we've seen the Netherlands repatriate 10 times what Germany has in the span of a few months. This is another case of "ignore what they say and watch what they do", and the fact that Germany was unable to do its own repatriation suggests that there is a major problem with the repatriation - either physical, symbolic, or both. Otherwise, why would the country announce repatriation and then later say that there was no need to follow through with it?
The fact of the matter is that if a European country repatriates its gold (and even buys more gold) then it can have a much stronger position in influencing ECB policy. How do I figure?
Well, because that nation can always threaten that it will leave the Euro if its economic policy needs aren't met - this in itself may collapse the Euro. Gold holdings allow a country to survive a post-Euro world as returning to a national currency would be much easier with more gold holdings, even if the currency is not backed by gold you have the confidence that gold holdings inspires. It is no coincidence that the US holds the most official gold and has sold zero ounces since the world started on a fiat standard in 1971.
Thus the fact that European politics is drifting towards strong populist leaders that are going to push for policies that benefit their own nations at the expense of others suggests that we may be seeing some significant pressure on the Euro moving into 2015 and 2016. That doesn't mean that the Euro will necessarily collapse, but it certainly means that the risk of collapse will rise - in which case central banks would want to have as much gold at hand as possible.
If we're right, then one of the tell-tale signs is not just repatriation of gold reserves, but the accumulation of additional gold reserves by European central banks. This may not be publicly announced, but we would see it in a weakening Euro relative to gold as European nations trade in Euros for gold.
In case you were wondering here is a graph of gold in US Dollars and Euros:
Interesting divergence starting in July as gold is approaching its highest levels of the year in Euros...
Conclusion for Investors
There may be much more to the recent gold repatriations (and gold repatriation talk) that investors are seeing by multiple European central banks than meets the eye. Maybe it's not all an issue of trust and auditing, but rather, a hedge by European nations about the stormy weather they see coming for the Euro in 2015 and 2016. The political climate is certainly getting uglier in Europe as populist parties are winning in the polls and anti-Euro sentiment grows across the board - which all suggests that the sub-2% bond prices we're seeing are nothing more than artificial central bank creations.
If it's bad now, what happens if bond yields start to rise and European markets start crashing?
That may push someone over the edge and we think that will only push anti-EU and anti-Euro sentiment further as Brussels, which has already lost control of the public, may lose control of the financial markets. That would bring back fears of a Euro collapse- fears that peaked a mere three years ago. But one thing we do know is that if it gets serious don't expect policy makers to be truthful - it will be too late at that point.
Investors shouldn't forget that performed extraordinarily well during the Euro crisis in 2010, 2011, and 2012 as it approached $2000 per ounce. We think gold should do well again if Euro fears resume, and that's why this beaten down sector may be golden for investors as they should accumulate physical gold and the gold ETF's gold ETF's (SPDR Gold Shares (NYSEARCA:GLD), PHYS, CEF). For those looking for more leverage they may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as First Majestic (NYSE:AG) or Pan American Silver (NASDAQ:PAAS). We're not suggesting these companies specifically - only suggesting them for further investor research. Investors interested in the miners may be interested in taking a look at some of our investment thesis detailing some of the rules we're currently looking for in a gold miner.
But we think the real opportunities right now are in the explorers, as their valuations are much lower than the miners and the fact of the matter is that these gold miners will be looking to expand reserves and buying out the quality explorers, so we'd suggest investors be aggressively investing in these quality explorers. For those interested in explorers, we'll be issuing research on the companies we like soon so or join our free email list, or find a high-quality newsletter writer or analyst that tracks and follows explorers - it's very important that investors follow the news flows out of the explorers they own as it is not a "buy-and-hold" type investment.
Investors should always remember that when it comes to policy makers that they need to follow what they do and not what they say. In this case, European central banks seem to be saying that the recovery is coming, yet they are bringing back gold reserves in increasing quantities. Not exactly a confidence inspiring move.
Disclosure: The author is long SGOL, PAAS.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.