ECB: Eurozone almost fully allocated

While I was researching foreign exchange reserves of central banks, I found this page on the ECB’s website. Much to my surprise, the ECB has begun publishing figures on their allocated and unallocated gold reserves since August 2015:

As GATA’s Chris Powell noted yesterday, the unallocated gold amounts to 2% of total Eurozone gold reserves. In context of issues Chris raises, I think there are a couple of other things of relevance here.

In contrast to other central banks, the ECB has a gold reserve of its own. A little over 500 tons. The Eurozone countries also have a gold reserve and this adds up to some 10.000 tons. The national central banks that form the Eurosystem are the custodians of official gold reserves and this gold is accounted for on the consolidated balance sheet of the Eurosystem. As a rule of thumb, there is one troy ounce of fine gold for every citizen in the Eurozone.

The publication of the ECB points out that the gold is either on deposit or is swapped. Allocated means that the Eurosystem owns its gold bars, that they are gathering dust in some vault with no strings attached. The unallocated gold is a financial entry however, where a Eurosystem central bank has a forward position, a claim on gold of sorts. Beside a modest return that central banks could earn with forward gold contracts, be it a swap position, or gold forward, they also gain insight in the ongoing affairs of today’s gold market. Whether gold on deposit and gold swapped should be accounted for in a different fashion is a matter open to discussion. And that includes the question to what extent transparency and accountability are professed in these forward and unallocated gold market operations.

As for interpreting the publication of these figures, I think the publication is quite important because from here onwards, the Eurozone is able to use its gold reserve any way it sees fit. To take the liberty to sum up the message: “The ECB announces the Eurozone is almost fully allocated”. And considering the various layers of paper gold contracts that are driving today’s gold price mechanism, it begs the question “are you allocated too?”

Let me share that ever since the financial crisis began, it has been my contention that there are three options on the table:
1. Print.
2. Default.
3. Restructure.

The first cannot possibly work although the relevant authorities have been trying “printing” anyway. Quantitative easing, a zero interest rate policy, a negative deposit facility rate? They do not strengthen the quality of credit. They only make the weight of credit heavier. That is, until it becomes too heavy for the real economy to bear. The current financial framework is an essentially political and redistributive system. It is a system that serves citizens’ interests inherently unequally. Whatever the motivations and narrative that policy makers rely on for their policy interventions, in my opinion, their efforts can at most buy time. Or put differently, they can only postpone an inevitable systemic insolvency.

From a historic perspective, I think it is important to note here, that the classical gold standard broke down because credit was denominated by a defined weight of gold (to borrow the words of Victor the Cleaner). Under an increasing amount of credit in circulation, the integrity of the denominator simply got crushed when its price rose, its circulation hampered and stopped as a consequence. The politically defined parity with gold broke down, rendering all currency contracts to write-down real loss. In comparison to the financial system of today, credit aggregates have grown exponentially, then stalled and lately, the denominator of the vast majority of international credit has increased in value. That dynamic? For sure, that is something to reflect on!

The second option on the table is to default. Essentially, a debt jubilee for one party is the nullification of private property of a counterparty. The political meaning and societal aftermath of such an approach would in my opinion be the equivalence of a declaration of war (whether purely economically, or worse) and/or the implementation of a dictatorship. A tricky road, both domestically and internationally, and one that I would never recommend. I would argue against it. Defaulting solves absolutely nothing and without a shred of doubt, it contradicts each and every single value that we hold dear in a free and civilized society.

The third option is the only option that could work in my opinion. For a restructuring to work however, gold reserves must be revalued and used to retire public debt. This way, you recapitalize the financial system that rests on government debt that currently operates as its risk free asset. I argue that this approach constitutes a transformation from a credit based economy to one that is equity based. In addition, I would also argue to restructure private debts where it makes sense to do (through debt-for-equity swaps) and start reforming our centrally planned economies fundamentally. I won’t bore you with my ideas how to proceed, or at least not here. But suffice it to say there is plenty of bureaucracy that is in desperate need of reform. We simply have got to stop professing economics with our neighbor’s wallet.

To end financial repression, we must tackle fiscal repression first. It is bankrupting us.

Let me go back to the recent publication of the ECB and to the Eurozone.

Considering the prevalent narrative on the euro, I think it is fair to say the euro is a widely misunderstood monetary construct. No matter how many times it is claimed the Eurozone is doomed to fail, or that some countries are better off outside, or that there is a need for a fiscal federalization of the Eurozone along with a change in the ECB’s mandate — beside mumble-jumble — I always think of 10.000+ tons of gold and how it is distributed within the Eurosystem. Moreover, of the macro-regions, only the Eurozone does not have a structural balance of payments deficit, or surplus for that matter. Ever since the euro was introduced. The issues Europe is confronted with are intra-European. And of all central banks, the ECB has a gold hoard that does not belong to a government. Meaning, the ECB is the one central bank that can use its gold to price the currency it issues. And however idiotic the mountain of public debt and unfunded pension liabilities in the Eurozone get, bid a similar idiotic number for a troy ounce of gold, and you make whole what has become outrageously insolvent.

Let me wrap up my thinking with a general question. What are official gold reserves intended for?

Are official gold reserves meant to back the currency that is issued? Are official gold reserves intended for settling balance of payment deficits and surpluses? Or are gold reserves intended to be used to retire all government debt, and create some extra to cover for all unfunded liabilities too?

Although I admit this is a rather European view, I would passionately argue the answer is all three.

The ECB has published figures pointing out is almost fully allocated. And if you ask me, that is quite a weighty message indeed.


Edit: In the fourth paragraph, some mistaken phrasing concerning the unallocated gold position has been corrected. h/t VtC.

Dr. Zijlstra’s Legacy and the 21st Century Renaissance of Gold

If you read the series of analyses by Dr. Jelle Zijlstra, one of the world’s most informed central bankers of his era (1967-1981), you have read a little over half a “modern book” on the historical backgrounds of the international monetary framework and the reasons for the Bretton Woods framework to collapse. My selection of translations portrays a great similarity to the extent that the essential point is repeated again and again and which is most eloquently described in Zijlstra’s autobiography of 1992: “Gold as the monetary cosmos’ sun”.

Here are my thoughts on why his analysis is highly relevant to today’s financial crisis.

Continue reading “Dr. Zijlstra’s Legacy and the 21st Century Renaissance of Gold”