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The Euro; as good as gold?

I may have little faith in our elected “leaders”, but I do not think them all dumb. I believe there are few accidents in policy, with knock on effects modelled well in advance. With this post, I am going to draw together different strands, that may, or may not indicate the euro will become the world’s global currency.

I am asking: is the euro is “as good as gold”? Please contribute your thoughts; they may help me sleep at night.

Many friends have asked me why the euro is so strong. I do not know, and this is not investment advice, but it is a good question. I do agree it is strange and I have no real insight on how or why traders make their decisions, it is simply the animal spirits. However, a question always on my mind is; could the eurozone gold reserves have anything to do with the matter?

To layout the timeline, we start in 1947 with the Bretton Woods conferences that established the International Monetary Fund and the redeemable link between gold and the US dollar by the world’s central banks.

At that time the United Sates Treasury and the IMF agreed to fix the dollar as redeemable in gold at a fixed price of $42 per ounce. Forty two paper dollars would get the Bank of England, or any central bank, one ounce of gold. Today, almost 65 years later, the model has been revised upwards to an incredible $47 per ounce.

Let us repeat that. The United States Treasury values the 8,400 Tonnes of gold in its vaults using a model a price of $47 per ounce, as does the IMF.

On the other hand, the European Central Bank values its gold reserves on a Mark to Market basis, which is the current market price; as high as $1,900 per ounce, or E1,200 per ounce.

Why the divergence? Surely, it cannot be accidental, an error by some eurocrat?

I cannot believe that I am saying this, because I truly loathe the man, but Gordon “Brown Bottom” Brown may have been onto something when selling the UK gold reserves.

For many it is simply unjustifiable that the sale of British taxpayers gold reserves by Brown occurred at a record low price for bullion. As the price dipped under $250 per Oz, some may recall that mines were going offline as uneconomical to work.

When the UK sales occurred, spot gold was around £160 per troy ounce and the HM Treasury received a little over £5 million per tonne. Four hundred tonnes were sold for gross proceeds in the region of £2 Billion sterling. This money was then converted into the euro, at an exchange rate of 1.50 euro to one pound sterling: Effectively net proceeds of E3 billion were added to the UK foreign currency reserves.

Because of the huge movement in gold since then, could “Browns Bottom”, really be considered “Browns Hedge”?

If Brown bought Euros at E240 per ounce of gold, and now those Euros, excluding M3 growth, are E1,200 per ounce of gold it could be a nice little earner.

As things stand on its balance sheet, the US gold reserves of 8,400 tonnes are valued at a little under $13 billion dollars. While the eurozone with 10,792 tonnes, stands at almost $400 billion on the balance sheet; thirty times as much.

Going back to Gordon Brown, he is an entirely political animal; he has a degree in history, not economics as widely claimed. Every single word uttered and decision he makes is a political decision. His choice to order bullion sales was widely discouraged, with the Bank or England asking for written instructions. I have no doubt it was part of a greater bargain.

Is as the pillars of the euro crumble, could the gold reserves be what is holding the eurozone together? The monetary base of the United States is around $10 trillion dollars, backed by E13 Billion in gold, according to the Treasury accounts.

In Europe, the monetary base is around E10 trillion, but according to the books, gold assets of some E500 billion back it. What this all means going forward, only time will tell, but one thing is certain: few know the real price of gold. Is fair value the model that underpins our monetary system? Is it the speculators betting against the monetary system?

PS: Many respected analyses have recently postulated that for total US debts to be backed by gold, it would need to rise to an astonishing $50,000 per ounce. To back the 30% required under the historic gold standard, the yellow metal would need to rise to about $10,000.