Noah Smith has a great blog post on the obsession with gold as a store of value or as an investment strategy. I fully share his views on gold and in particular about the arguments made by those who see gold at the center of the world economy and the best investment one can do these days.
Interestingly, his blog post comes the same day that all business media report on the announcement of the Bundesbank that they are moving some of the gold reserves back to Germany. The move of these gold reserves is partly seen as a response to an earlier report by the German court of auditors that was concerned with the lack of checks on the gold reserves held abroad.
The story not only made up the headlines but it also came with a quote from Mr Thiele, Bundesbank board member who commented on the purpose of the reserves and the move by saying
"To hold gold as a central bank creates confidence. We build trust at home and have the possibility to exchange gold at short notice into foreign currency abroad."
I am really curious about what (doomsday) scenarios he has in mind where the gold reserves of the Bundesbank would become crucial to restore confidence. By the way, the gold reserves of the Bundesbank which at 130 Billion Euros are large compared to other central banks seem small compared to many other magnitudes that matter in financial markets, more so during crisis time. And I am assuming that these scenarios are catastrophic, otherwise why would gold be needed to buy foreign currency. And given that they are thinking that those scenarios are likely, is there anything that they are planning to deal with them?
There is, however, one positive outcome out of this news and Mr Thiele's quote. I need to teach my students tomorrow about central banks and the history of the monetary system (including the gold standard) so I know have some good material to motivate my lecture.
Antonio Fatás