STAFF NEWS & ANALYSIS
Gold Reserves More Important Than Before Says Bundesbank
By - August 26, 2008

Germany's Bundesbank on Friday rejected calls that it should sell some of its gold reserves to help boost the slowing German economy, telling Reuters financial and political uncertainty make the reserves even more important than before. "Gold sales are not a suitable way to sustainably consolidate the public accounts," the Bundesbank said after a query about trade union proposals that it sell gold to fund some of a 25 billion euro ($37 billion) economic stimulus package. "National gold reserves have a confidence and stability-building function for the single currency in a monetary union. This function has become even more important given the geopolitical situation and the risks present in financial market developments." The Bundesbank is the world's second-largest holder of gold after the U.S. Federal Reserve, and has sold just 20 tonnes out of total reserves of over 3,000 tonnes in the past five years. These sales were to allow the German finance ministry to mint gold coins, unlike the much more active sales programs of other central banks which wanted to shift their portfolios from gold to a more diverse array of assets. To reduce volatility in the price of gold, 15 European central banks agreed in 2004 to limit gold sales to 500 tonnes a year over the next five years. – Reuters

Dominant Social Theme: Old, fuddy duddy Bundesbank! Gold is so "yesterday."

Free-Market Analysis: Or is it? Maybe this is big news, confirming what we have long suspected – that the world still runs on a "kinda-sorta" gold standard, whether super-financiers want to admit it or not. How is this possible? Just because there is not a formal agreement doesn't mean that the reality still holds. Think of political structures where the power base is other than where it seems to be. (Russia comes to mind.)

During the "Asian contagion," way back in the 1990s, it is said that European banks, especially, demanded that Korea pay its debts back in gold because the bankers didn't trust the currency at that time. In fact, Korean officials are said to have traveled door-to-door to collect the necessary gold (on patriotic grounds).

In general when anxiety goes up around the world, so do gold sales. That's what's made the current disconnect between the markets and prices so odd recently. Even as the US Mint has indicated that it was ceasing or slowing the sale of gold and silver eagles, even as there is distress among some jewelry makers and sellers, the prices of gold and silver have continuously headed down. Now the US Mint has hurried to re-offer gold bullion, but they're still poor-mouthing supplies, as follows:

The U.S. Mint said it must allocate the American Eagle bullion coins among dealers to cope with overwhelming demand as it resumed taking orders for the popular coins on Monday. "The unprecedented demand for American Eagle gold one-ounce bullion coins necessitates our allocating these coins among the authorized purchasers on a weekly basis until we are able to meet demand," the U.S. Mint told its authorized American Eagle dealers in a memo dated August 22. Last week, soaring demand forced the U.S. Mint to suspend temporarily sales of the American Eagles, creating a shortage in the one-ounce version of the coins, which are also available in other weights and denominations. – Reuters

So how it is possible that prices have decoupled from supply and traveled down so far and so fast even as the metals markets have tightened significantly? Some have indicated that this is indeed a kind of "smoking gun" that proves that the metals markets are manipulated. And that may be true. We've been fairly convinced of hanky panky for some years now. GATA's uncovering of evidence in this regard has been helpful. But maybe it's not even that complicated. Just watch how the New York commodities traders crush gold over and over during the open, and then again at the close – as they have for years.

Now why would anyone bother to manipulate gold and silver prices? Maybe because money metals are a direct threat to paper money. Central banks like to print money and if people had the freedom to use gold and silver as currency there would probably be a lot less central banking money to go around. Certainly, there is a saying that bad money drives out good, but in fact were gold and silver to circulate freely, the chances are the use of paper money – of the current kind – would drop to near zero.

Here's a question: What would you chose to hold and use – rapidly depreciating fiat currency or gold and silver which has risen steadily in value in the 2000s even after most important Western currencies – and especially the dollar – have dropped in value at the same time.

After Thoughts

So the Bundesbank has done us all a favor by coming out and saying what we all probably believe either secretly or publicly – that gold and silver, especially gold in the case of the Bundesbank, are real money. The German bankers told Reuters: National gold reserves have a confidence and stability-building function for the single currency in a monetary union. And all across the Western world you could hear the rustling of gray flannel suits as bankers rose up as one to cry "sh-hh!"

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