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But bullion could be used as collateral. In fact, if Europe’s politicians truly believe that the problems of larger Eurozone countries such as Italy are based on liquidity rather than solvency, the use of gold as collateral could be a neat way to regain the confidence of the bond markets.

For prospective investors (no doubt including emerging market governments, sovereign wealth funds, and the like) the appeal comes from the likely hedge that the gold would provide against a default. If a country such as Italy were to default, most analysts believe, the price of gold (certainly when denominated in euros) would go sky high.”

The FT goes on to say that “For Eurozone countries, gold-collateralized bonds could unlock a large pool of new financing. Italy’s central bank, for example, holds 2,451 tons of gold, worth about €100bn. While that pales in comparison to its total debt stock of nearly 2,000bn Euro’s, it could alleviate some of the short-term funding pressure.

Italy needs to raise about €600bn over the next three years. If it used the yellow metal as collateral for the first 20 per cent of the new bonds, therefore, it could cover its needs until mid-2014. A successful sale of the gold-backed debt would create a virtuous circle, making it easier to raise money through non-collateralized borrowing. Such a deal has precedents. Indeed, Italy has done it before, when it received a $2bn bail-out from the Bundesbank in 1974 and put up its gold as collateral. In 1991, India used its gold as collateral for a loan with the Bank of Japan and others. And in 2008, according to the World Gold Council, Sweden’s Riksbank swapped its gold to raise cash and provide liquidity to the Scandinavian banking system. As Paul Mercier, then deputy director of market operations at the ECB, told a gold industry conference in 2009: “In a generalized crisis that leads to the repudiation of foreign debts or even the international isolation of a country […] gold remains the ultimate and global means of payment that is still accepted and it is one of the reasons used by some central banks to justify gold holdings.”

The problem is, as that statement implies, that countries have historically turned to their gold reserves only in the direst of situations. And lenders are likely to require that the gold is moved to a neutral location. India’s move to ship 47 tons to the Bank of England in its 1991 deal caused outrage within the country. Nonetheless, as the eurozone crisis grinds into its third year, it might just be time to dust off those Roman coins in the Banca d’Italia’s vaults.’ Great Read in FT!

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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