The German gold conundrum

The German gold conundrum

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 30th of January.

Germany’s recent move to bring back substantial portion of its gold reserves from the US and France has raised many eyebrows. Though the Bundesbank tried to downplay the measure as mere monetary housekeeping, the timing remains a suspect.

German policymakers probably think that we are fast approaching a every-country-for-itself scenario and only gold held in own vaults is the only solution. But a world order where mutual trust breaks down completely that requires relocation of gold reserves is a cause for major worry. International trade will come to a halt and multinational firms would struggle to sell their products across the borders.

Or perhaps German policymakers are preparing for a longer term shift of international preferences away from the greenback as the reserve currency. This is an acceptable argument as the Chinese renminbi gains prominence and greater diversification of portfolios by US creditors is justifiable.

But moving gold would hardly help Berlin’s cause still. Rather, promoting the euro as a stable and safe currency will lift future prospects. Moving gold reserves in that context, is a pure distraction.

Does Germany think the era of gold standard will make a comeback? Even if it did, what would matter is the amount of gold Berlin owned, and not where it was physically stored.

But Germany worry seems to stem from growing politicisation of central banks and the prospect of inflation due to loose monetary policies pursued by the US Fed and the ECB. The real fear is not price rise, but the failure to see it until its too late and the subsequent loss of competitiveness.

To be sure, moving gold has got nothing to do inflation. US President Richard Nixon broke the link between gold and currencies permanently in 1971 with the abolition of the Bretton Woods System. Since then we have lived in a purely fiat money system; currency values are no longer tied to gold or other commodities.

However, German policymakers are right on one count. The ECB’s policies are unlikely to deter the profligate states. The fiscal overhang is likely to undermine monetary policies, making inflation-control much harder. Bundesbank’s concern over wayward monetary policies is surely not misplaced.


GBP/EURO – 1.1656
GBP/US$ – 1.5753
GBP/CHF – 1.4528
GBP/CAN$ – 1.5785
GBP/AUS$ – 1.5059
GBP/ZAR – 14.2086
GBP/JPY – 143.47
GBP/HKD – 12.2178
GBP/NZD – 1.8842
GBP/SEK – 10.0280

EUR: The single currency rallied against the greenback yesterday, rising to a near 24-month high as upbeat economic news from the currency-bloc boosted risk appetite. German Consumer Climate data came out slightly higher than projected, reinforcing the belief that economic sentiment is improving in Europe’s largest economy. The UER/USD pair has broken the 1.3500 level this morning for the first time since December 2011 and sits at 1.3505. Out today we have the fourth-quarter Spanish GDP data. Today also sees the auction of 30-year German and 10-year Italian bonds. Continued heavy demand for euro means the GBP/EUR pair has weakened over the past 24 hours and the pair is trading at 1.1659 now.

USD: Sterling has steadied over the past 24 hours following news that one of BoE’s policymakers have suggested that the economy will expand 2 and 2.5 percent over the next 24 months. Investors have taken a break from shorting cable and have used this opportunity to lock in some profits ahead of today’s US GDP release in the afternoon. We also have other risk events due over the next few days, including the FOMC statement tonight and the non-farm payrolls due on Friday. Investors expect Fed Chairman Ben Bernanke to give clues as to when the central bank plans to slow down its bond buying program this year while there is some consensus that the US economy has likely grown 1.1 percent in the fourth quarter. The GBP/USD pair opens at 1.5765 this morning.

Have a great day!


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