Ten Nations That Control the World’s Gold

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5) China
> Gold reserves: 1,054.1 tonnes
> Pct. of total foreign reserves: 1.7%
> GDP: $7.3 trillion (2nd largest)
> Stock performance: Shanghai Composite 6.6% lower in Q3, 5.4% lower YTD

China’s economy has stumbled to the point that its official growth rate of 7.4% in the third quarter may feel like a recession. China has the ambition of becoming the largest economy in the world. It already is considered the world’s manufacturer. China must have hard assets along with its U.S. Treasury bond holdings to keep its currency pegged to the U.S. dollar. It has the world’s largest population, with more than 1.3 billion people, yet its GDP of almost $7.3 trillion is still not even half that of the United States. Whenever the yuan truly floats, China will have to have more hard assets and more transparent economic readings to support it. China added some 454 tonnes of gold between 2003 and 2009. When it finally adjusts its official gold holdings in the coming months, they are likely to be higher again.

4) France
> Gold reserves: 2,435.4 tonnes
> Pct. of total foreign reserves: 71.6%
> GDP: $2.77 trillion (5th largest)
> Stock performance: CAC rose 4.9% in Q3, up 6.1% YTD

France finds itself in an interesting position. Socialist president Francois Hollande is on a quest against many of the austerity measures implemented by his predecessor, Nicolas Sarkozy. France does not want to lose its “second-best economy” status in the eurozone, behind Germany. It will have to pay for the new economic measures and this poses a particular problem because the extremely wealthy, who are being targeted for high taxes, may continue to leave the country. France may ultimately need to sell gold. Although it is part of the Central Bank Gold Agreement as a gold seller, it may need a cushion in case the euro faces an outright breakup.

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3) Italy
> Gold reserves: 2,451.8 tonnes
> Pct. of total foreign reserves: 72.0%
> GDP: $2.2 trillion (8th largest)
> Stock performance: Borsa Italiana MIB rose 5.7% in Q3, flat YTD

Italy is a financially troubled nation, and it is truly too big to bail out. By many measures it is the greatest economic risk to the rest of Europe and the balance of the major world economies. Italy’s 61 million population ranks 23rd in the world, but its dollar-adjusted GDP of almost $2.2 trillion ranks it as the 8th largest economy. The Italian government was also part of the Central Bank Gold Agreement, but there is a real conundrum now. Italy could sell gold to raise capital, but then it would lose its cushion if the euro unravels. It is almost impossible to imagine that Italy would be a buyer of gold because it has too many pensioners and benefits to pay for as is.

2) Germany
> Gold reserves: 3,395.5 tonnes
> Pct. of total foreign reserves: 72.4% of foreign reserves
> GDP: $3.6 trillion (4th largest)
> Stock performance: DAX rose 12.4% in Q3, up 22.3% YTD

Despite forced gold sales from ECB nations in the past, Germany likely has to maintain its underlying asset base as it is the anchor of the euro. The euro after all, is a watered-down version of the Deutsche mark. Germany’s population of 81 million ranks 16th in the world, but its $3.6 trillion adjusted GDP ranks fourth. What could happen if Germany started accelerated gold sales to buy up even more paper assets from the PIIGS (Portugal, Italy, Ireland, Greece and Spain) and more paper assets of their banks? The initial reaction might be positive for the eurozone economies. However, Angela Merkel and her successors might be left with high inflation without hard assets as a cushion. Germany is supposed to be a gold seller under the Central Bank Gold Agreement, but it is likely to hold what it can as a buffer in case the euro breaks up or in case it needs to raise quick bailout cash for the PIIGS.

1) United States
> Gold reserves: 8,133.5 tonnes
> Pct. of total foreign reserves: 75.4%
> GDP: $15 trillion in GDP (the largest)
> Stock performance: S&P 500 up 5.7% in Q3, up 14.5% YTD

It should be no surprise that the U.S. is the largest holder of gold as the dollar is the global reserve currency and the U.S. has by far the largest GDP of any nation. The growth of the Federal Reserve’s balance sheet can only be sustained without dire consequences if it is backed by hard assets like gold. Imagine if the conspiracy theorists are right and that Fort Knox and other repositories do not have gold in them. It is this gold, the massive U.S. GDP and America’s underlying wealth of natural resources that keep the dollar as the world’s reserve currency. If the World Gold Council is right in its assessments of inflation and gold, then the U.S. is likely to hold its reserve currency status for quite some time, even if credit rating agencies continue to downgrade the country.

JON C. OGG

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