A Gold Buffer

Among the various remedies put forward to deal with the Euro sovereign debt crisis — restructuring, Greek and/or Portuguese exit from the Euro, the issuance of European backed bonds — one that has been barely mentioned is the sale of gold. True enough, it does not come close to offering a complete cure.  With respect to two countries, though, the proceeds of such a sale could make something of a dent in their respective debt loads.

Take Italy first. It is ranked third among countries in terms of gold reserves. As of December 2010, it held 2,451.8 tons of gold.  Doing the math (16 ounces per pound X 2,000 pound per ton X US$  1783 per ounce), Italy could garner US$ 139.8 billion for its gold reserves. Given Italy’s approximately trillion dollar economy, that would cut its public debt by about 7% of GDP. As its public debt is currently 118% of GDP, such a sale would bring that figure down to just north of 111%. Not much admittedly, but it would be a respectable start.

Portugal would be able to take a bigger swipe at its debt . For this, strangely enough, the small Iberian nation can credit Antonio Oliveira de Salazar, who was very focused on amassing gold reserves while ruling the country as a dictator from 1932 to 1968.  As a result, Portugal has 421.6 tons of gold in reserve, now worth  US $24 billion. As the Portuguese state owes around US$ 200 billion to its creditors, a sale would bring down its public debt to GDP ratio by 12%, from 84% to 72%.

This would definitely calm bondholder nerves in the short-run, enough time at least to enable the country to implement reforms to address its structural weaknesses. The necessary reforms would basically entail a major diminution in the size and reach of government.

A more ideal solution, however, would be for Portugal to keep its gold, leave the Euro, bring back the old Escudo currency — but this time fully backed by gold.  What an example that could set for the world!

But don’t expect this to be implemented anytime soon. If Italy and Portugal are going to do anything with all their gold, it will probably be to sell it.

 

4 Responses to “A Gold Buffer”

  1. George Bragues says:

    Crossroadsman:

    And here is the first part of my response to you:

    Thanks for alerting me to the difference between avoirdupois ounces and troy ounces. I originally assumed 32,000 ounces in a ton. But it turns out that, with respect to gold, the measure used is metric tonnes. Each such tonne equals 32,150.746 troy ounces. Running the numbers again, the value of Italian gold reserves is $140 billion. For Portugal, it'd be $24 billion. In both cases, not much different from what I had originally calculated. But still a point worth noting.

  2. George Bragues says:

    Crossroadsman:

    The comment box imposes a limit on how many words. Here is the second part of my response to your comment:

    You are correct that Italy or Portugal would cause the gold price to decline if it tried to sell all its gold at once. Presumably, they'd try to do it incrementally over time so as not to sink the market. It'd be hard to say what exactly their average price would end up being if they followed this strategy. The bias on price would definitely be downward. Still, it would greatly depend on how the gold market trended over the period they were selling.

  3. George Bragues says:

    Crossroadsman:
    Crossroadsman:

    Thanks for alerting me to the difference between avoirdupois ounces and troy ounces. From what I've been able to tell quickly researching the matter on the web, with respect to gold, a ton refers to a metric ton. A metric ton, in turn, has 1,000 kilos which equates to 32,150.746 troy ounces (see the Standard Bar weights section here: (http://en.wikipedia.org/wiki/Gold_bar) . I had originally assumed 32,000 ounces on an avoirdupois basis. If we run the numbers again for Italy (2451.8 tonnes X 32,150.746 troy ounces X US$1783 per ounce), we get US$140.5 billion. That isn't much different from the 139.8 billion I originally specified. As for Portugal, the amount would be $24.16 billion. Again, not much different from what I originally cited.

  4. Just a couple of observations: unless you are quoting a gold price in avoirdupois ounces (unusual) the correct math would be 2,451.8 short tons = 4,903,600 avoirdupois pounds = 71,510,833.33 troy ounces (@ 175/12 troy ounces per avoirdupois pound) = US$127,503,815,833 (which is still a fair amount!). The second observation is that while the next ounce might trade at US$1,783, the next 71.5 million ounces would trade at significantly less, so Italy would realise much less than $127.5 billion by selling "its" gold.

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