Many have suggested that Italy should sell its substantial gold reserves in order to pay down some of its debt and avoid a sovereign debt crisis. We view such proposals as ridiculous, due to the magnitude of Italy’s debt relative to the value of its gold holdings.
However, one such proponent of such a transaction is Gunther Krichbaum, a lawmaker in German Chancellor Angela Merkel’s governing coalition and he is also the Chairman of the Committee of the Affairs of the European Union. The German Bundestag has proposed that Italy sell its sizeable gold reserves in order to lower its debt, implying that Italy’s gold reserves are relatively high and could be used to pay off their sizeable debt. The same suggestion has been put to Germany in the past and it was met with an emphatic rebuttal.
Whilst Italy does have substantial gold holding and should be commended for not selling these reserves (as Gordon Brown did in the United Kingdom, selling at a gold price of around $275/ounce), Italy's reserves are dwarfed by their level of debt. The Italian Government has approximately EUR1.6 trillion in outstanding debt. This is an incredible amount. The schedule of repayments for the next ten years is shown below.
So we know about the debt, but how much gold does Italy have?
Italy has 2701.9 tons of gold, one of the largest reserves in the world. Assuming that Italy could sell all its gold for USD$1800/oz, then their gold reserves are worth EUR115.28 billion. On its own this number may be impressive, but it pales into insignificance when compared to Italy’s EUR1.6 trillion.
Italy’s interest obligations over the next three years comes to over EUR127 billion and the value of their gold is just over EUR115 billion, therefore, selling all their gold now will not even cover interest payment obligations for the next three years.
In 2012 Italy will have to repay over EUR167billion in debt, the value of their gold stands at a little over EUR115 billion. So we can see that selling all their gold now will only raise enough cash to repay 68.8% of next year’s debt obligations.
Even if Italy were to sell all of their gold reserves they would only reduce their outstanding debts by just 7.14%. So Italy would have no gold reserves and still have 92.86% of its debt.
As this move has little effect on Italy's financial health then we have to question the wisdom of such a transaction. Also bear in mind that such a transaction has been proposed in the past and rigorously rebuffed by the Bank of Italy.
These suggestions amount to chasing after billions when the problem is in the trillions. This is typical of the eurocrats in that their strategies are usually too little too late and this one is looking increasing like it is too big to bail.
The European crisis continues to look like a train wreck in slow motion, it will take a long time to co-ordinate an all encompassing solution to be formulated, agreed and then implemented.
As investors our core position is made up of physical gold and silver, and a small number of what we deem to be quality precious metal mining stocks, along with the occasional options trade. We will maintain this strategy as we remain unmoved and unimpressed by the actions of our political masters.
Chin up and have a good one.
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