Gold: Great for uncertainty, not for eurobonds

By Vikram Barhat | November 22, 2011 | Last updated on November 22, 2011
2 min read

As media speculation mounts about the possibility of gold becoming collateral for eurobonds, bullion experts in Canada say it’s highly unlikely that such a move will ever see the light of day.

Eurobonds can’t be backed by gold simply because the asset-to-debt ratio in the Eurozone is too far out of whack, says Nick Barisheff, CEO of Toronto’s Bullion Management Group.

“It sounds like a good idea, but the relationship between the amount of gold reserves and debt gives you a very low percentage coverage ratio,” he said.

France, for instance, holds 2,400 tonnes of gold reserves, worth €97 billion, which doesn’t put much of a dent in its €4.2 trillion foreign debt, he said.

Greece’s €400 billion foreign debt is similarly too large for the €4.5 billion worth of bullion in its vaults. In the case of Greece, there’s another problem: the possibility of exiting the eurozone and reverting to the drachma.

“If they put up their gold as collateral, it really precludes them from having the option of ever exiting the euro and going back to the drachma, because they would have no gold [to provide] any backing that they’d desperately need at that time,” Barisheff says.

Whether gold ends up as collateral for eurobonds, Canadian investors should have larger gold allocation in their portfolio, he says.

“Investors in Canada are nowhere close to having a decent [gold] allocation to begin with,” he says. “Right now the gold price has pulled back a bit and is like a discount gift for the moment; but investors and financial advisors haven’t’ come around to this. It’s been the best performing asset class for 10 years [yet] it is grossly under-owned.”

Paul Taylor, chief investment officer, BMO Harris Private Banking, couldn’t agree more.

“The case for investing in gold shouldn’t be based on the potential for gold to be used as a backstop for the euro currency,” he said. “It’s working as an alternative to the U.S. dollar and it’s a direct gauge of the uncertainty in the capital markets.”

Taylor, like many other financial analysts, is of the view that gold-collateralized bonds look a little “far-fetched.”

What is certain, though, is that “uncertainty related to the Eurozone will continue to persist for some time and gold will serve as a national hedge to that.”

Vikram Barhat