Since the beginning of the euro zone mess investors and hedge funds have brought up the idea of using gold reserves to back bailout money. It is a great concept as the euro zone central banks have 10,792 tonnes of gold which is about 6.5% of all gold ever mined and is worth around $590 billion.
Until recently it has only been referred to by gold bugs as a possible solution, but deep in report by European Commission study on joint ‘Eurobonds’ is a suggestion to use gold as collateral for the bonds.
Even though these reserves are in excess of what most European countries need it does not mean that they will be selling off their reserves. Especially since central banks have been net buyers of gold over the past two years. Central banks are no dummies. But this gold bullion could be used as collateral for bonds, giving outside investors confidence that they would get paid back in the event of a default. Especially since any default of a European nation would likely cause gold to skyrocket.
Italy needs to raise around $600 billion in the short-term. Italy has around $100 billion worth of gold in reserve that they could use to generate enough money to get them through 2014 and thus help them increase confidence in their non collateralized debt.
The only problem with this solution is that central banks are unlikely to relinquish their gold reserves. History has shown that central banks will only do so under the direst of circumstances. Therefore the chances are slim that they would use gold as collateral. Much more likely are central banks to continue to push the liability onto the backs to the taxpayer then to take the risk of losing their gold. After all, central banks are privately owned entities. Any investor getting a guarantee on their loan using gold is more than likely going to request that the gold be moved to a neutral location. I don’t think that any central bank is going to want to relinquish control of their gold.
So while it could be a solution that would help the euro zone countries out of this mess, I highly doubt it will be used. We will just have to wait and see. In the meantime keep accumulating your position, just like the central banks are doing, while we are in a dip.