Gold reserves to play a key role in new economic order
NEW YORK (Commodity Online): Gold has recently been moving in locksteps with the single currency, which fell to its lowest level against the dollar in two years as investors continue to fret about Spain’s vulnerable fiscal conditions.
Gold prices may have fallen out of bed over the past four months. But gold as a currency is gaining ground as gold reserves are increasingly being allocated a more important role in the coming new economic order.
Under a $3.5 billion stabilisation plan being promoted in Germany as the European Redemption Pact the heavily indebted eurozone states would use hard assets such as their gold and currency reserves to back a new type of euro bond.
By back stopping with gold and other currencies the fear of euro bonds opening a pandora’s box of additional spending would be closed. Basically public debts above 60 per cent of GDP would be pooled into the ERP.
Germany would still pay a higher price in terms of interest payments on euro bonds instead of its own bunds. The Latin economies of Europe would be bailed out again, though they would still need to go through recession and austerity to restore their competitiveness.
Gold is also heavily tipped for a new role in the Basle III reserve requirements for the banks. Essentially the proposal on the table is that banks be allowed to include 100 per cent of their gold assets in this ratio rather than half as at present.
According to the latest International Monetary Fund (IMF) data, global central banks gold purchasing reached 70.3 tonnes in April this year. The Central banks continue to increased their foreign exchange reserves into gold bullion due to concerns about fiat currencies – including the dollar and especially the euro.
Central banks were again net buyers in April with Turkey and Philippines being the largest gold buyers. Mexico, Kazakhstan, Ukraine and Sri Lanka also increased their gold reserves in April.
Global central banks are continue to stock up on gold while prices are low this summer. It is interesting that those countries with experience of currency instability are among the biggest buyers of the yellow metal.
The big banks are only just getting around to taking gold seriously. One estimate from gold bullion dealer Sharps Pixley is that Basle III might result in an additional demand for 1,700 tons of gold.
For make no mistake gold prices will not stay at current levels as this becomes the global currency of choice.