Notes From Underground: Why So Much Weight on Italy and Its Gold?

There has been much discussion this week about how the current Italian government wants the nation’s GOLD to be the “property of the state” instead of on the Bank of Italy’s balance sheet. The coalition of Five Star and League have thought to gain control over the gold and some pundits have raised the idea of Italy selling its gold holdings, the world’s third largest, in an effort to plug holes in the budget. (NOTE: The Italian government is actually the fourth largest when the IMF is included.) Italian Prime Minister Matteo Salvini maintains that the government has no plans to sell any of the people’s GOLD. Maybe the Salvini Government is deciding to take the advice offered for the last eight years here at NOTES and monetize the GOLD by issuing GOLD-BACKED BONDS. (Securitizing the gold by selling bonds backed by one-fifth of an ounce of gold.)

I have suggested many times that the IMF use its gold hoard for this purpose instead of always asking its member states to contribute ever more funding. The Italians would be able to borrow more cheaply in the global markets if they would secure its bonds with some hard asset. It never fails to amaze me that Keynesian-oriented economists do not promote the leveraging of gold. Put the barbarous relic to work. We should watch Italy to see if it in fact monetizes its gold for it would be a model for other nation-states.

As an aside, the Bundesbank actually did a study in 2012-13 in which it offered up analysis on a country’s ability to lower its borrowing costs by securitizing its sovereign debt with GOLD. (If you do a search through the NOTES FROM UNDERGROUND archive, readers can find many posts about gold-backed bonds.)

***CNBC’s Rick Santelli did a splendid interview with Jim Grant on Thursday. It’s absolutely worth a watch as Rick talks to the world’s smartest interest rate observer about central bank balance sheets and negative interest rates. (Yes, he’s even more knowledgeable than those academics populating the FED.) In the interview, Grant raises the issue that negative rates coupled with QE has severely broken the signalling mechanism of global bond markets.

More importantly, Rick and Jim analyze Steve Liesman’s interview with Fed Governor Lael Brainard. The issue for Grant is that the FED is overly concerned about quelling volatility, which puts the controller of the FIAT CURRENCY as overly concerned with all types of assets beyond its mandate. Is it spending too much treasure eyeing the value of the stock market?

***Brainard rediscovered her dove wings and praised the FED‘s recent pivot away from “auto pilot” on shrinking the balance sheet and four rate increases this year. The Fed governor’s rationale is the headwinds in the international economy, which is leading to tightening global financial conditions. The FED now has to be careful, according to Brainard, not to push too fast for fear of impinging on growth abroad. This is exactly what I have been warning about. The FED really has a tri-mandate as it will invoke concerns about global VOLATILITY and UNCERTAINTY when it needs an issue to remain wedded to its current level of rates.

U.S. data seems to be on an equal with worldwide concerns, especially Europe and China. I am not making a qualitative judgement about this, just raising criticism about the nonsense of a dual mandate in the time of dynamic global capital. The global reserve currency fulfilling its role as lender of last resort. A strong dollar thus becomes an ever greater problem for the tri-mandate. The Italians may be led by wiser leaders than we have assumed.

***The most ridiculous headline Thursday was, “Germany Escapes Recession.” In the previous quarter, Germany had a negative growth number while its latest quarter has ZERO, so technically two straight of quarters of negative growth does a recession make. Wow, ridiculous indeed. The sluggishness in the German economy has already led to BUND yields dropping below 10 basis points while the DAX index remains locked in a range. German corporations are plagued with low growth and fears of global trade wars. The current definition of a recession is the epitome of driving while solely looking through the rearview mirror.

You don’t have to be an economic weatherman when you know where BUND yields are. They’re 9.5 basis points, even as the German economy is at full-employment, a 38-year low of 3.3 percent. Maybe the FOMC ought to be examining the German situation: über low growth, record low unemployment  and negative interest rates and yet the stock market is stuck in neutral.

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19 Responses to “Notes From Underground: Why So Much Weight on Italy and Its Gold?”

  1. Michael A Temple Says:

    The ECB can NEVER allow the Italians to hypothecate “their” gold as it would put LIE to the “backing” of the Euro.

    Only AFTER the Euro no longer exists might we see such a gold-backed financing.

    Same would apply for the USD at some distant date in the 2020s

    • yraharris Says:

      Michael—Salvini is no fool as he knows he has many cards to play.He is pushing the buttons of the Eurocrats in Brussels in an effort to gain more concessions for the Italians—hey Matteo,play on.

  2. Srjean Dosenovic Says:

    Hi Yra,

    How should gold-backed bonds work in your opinion? Italy has about 2000 metric tonnes of gold, at current prices this is worth about USD $70 billion. Not nothing but not much compared to their budgetary needs. What am I missing?

  3. yraharris Says:

    Srjean—-I would use a percentage of an ounce to back every bond so the numbers can grow dramatically and from every study I have read,including the Bundesbank ,it would lower a nations borrowing cost,but it is not a hard level as keep debtor is different.I would gladly except less then 2.8% on an Italian BTP backed by gold especially if the gold was numbered and /or blockchained and good be called if the debtor defaulted–if a nation monetized its debt load the value of gold would probably rise helping to secure the credit instrument.My point is that its usefulness would be garnering lower borrowing costs while putting the barbarous relic to work

  4. Frank Flanagan (@0_sum_game) Says:

    Yra you may be interested on the legal ownership of the Italian Gold and that the Banca d’Italia is privately held.

    • yraharris Says:

      Frank—if we are looking for a spark to begin that Populist Prairie Fire—tell the citizens of Italy that their Gold is owned by the Sycophants of the Davos crowd.Who owns the stock of the Bank of Italy—bunga,bunga,bunga

  5. Bosko Says:

    Yra, if Salvini pays for my espresso, I’d be happy to meet him at a cafe and show him how to securitize Italy’s gold–I’d even give him a discount to register with a CUSIP number on my platform, . However the key to issuing gold bonds, successfully, is trust and convertibility into physical, and since Nixon reneged on Bretton Woods in 1971, how can anyone trust a government issued gold bond? The only way is through a third-party private custodian who is not allowed to lease the gold. The USA was the gold custodian of the world, but they screwed it up by leasing out other peoples gold, and when the time came for delivery–the vaults were empty. As a result– Kissinger introduced the petro-dollar to re-gain confidence in the USD, and now even that’s falling apart. What’s next…crypto-USD?

    • yraharris Says:

      Bosko —I was anticipating your contribution to the conversation.For all my readers you should check out Bosko’s work in monetizing gold as you own it.He has done yeoman’s work in this regard and although I don’t openly promote “products” the fact he opened the box in an intelligent fashion means –go take a look

  6. asherz Says:

    As long as the topic is gold backing currency or debt, these two links should be of interest.
    The first is the story of the Mississippi Company and John Law, 300 years ago.

    The second is the chart I posted earlier this week. Both IMO should concern anyone thinking about how money is treated among nations.

    • yraharris Says:

      Asherz–thank you for your always constructive knowledge to the discussion—when Asherz offers up his decades of wisdom—-take the time to read/listen in an effort to advance the discourse

  7. Trader1 Says:


    I cant remember the exact quote but didn’t Draghi say several years ago gold was something like “junk” or “useless” indicator??

    Draghi should stick by his quote and rush to off load this gold ‘junk’ to Salvini.

  8. Publius Says:

    Non sequitur—Googling prairie spark, Mao Zedung, and *Notes from Underground* from years ago appears #2 on search! Yra famous.

  9. Arthur Says:

    The case for gold (the economist)

  10. ShockedToFindGambling Says:

    Yra, good article….two comments.

    I think the Italian gold-backed bonds need to be close to 100% collateralized by Gold, or there won’t be much interest in buying them.

    Secondly, I think they will need an indisputable, 3rd party custodian for the Gold, to make sure it’s there when needed.

    i don’t know if such a custodian exists… I recall, it took the Germans years to get back the Gold that they had “stored” at the NY FED.

    Should have taken weeks if the Gold was really there and unencumbered.

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