Will The Europeans Have To Sell Their Gold?

Brett Arends MarketWatch December 20, 2011

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Dec. 20, 2011, 12:01 a.m. EST

By Brett Arends, MarketWatch

LONDON (MarketWatch) "” If the Italians can't persuade the bond markets to keep them in business, they have another card up their sleeve.

Few people realize it, but Italy holds the world's fourth biggest stockpile of gold, at 2,452 tonnes. That's even more than France, and more than twice as much as China.

Only the U.S., Germany and the International Monetary Fund hold more.

The question here is whether some of the troubled European countries "” such as Italy and France "” are going to have to start selling off the national gold pile to meet their bills.

Some wonder if they already have.

Italy's gold has a street value of about $123 billion "” easily enough to cover this year's $80 billion budget shortfall. Portugal's $19 billion in bullion more than covers its $13 billion deficit. France has $122 billion worth of bullion, enough to make a massive dent in its $150 billion deficit.

Meanwhile, look at the people who actually have a lot of money "” namely, the Chinese. I continue to suspect that, sooner or later, China is going to move some of its massive $3 trillion-plus reserves into gold, the only currency that no other country controls. At the moment, the richest Western countries, including the United States, Germany, Italy, and the Netherlands, hold between 60% and 80% of their entire reserves in gold.

The figure for China: Less than 2%. No, that isn't a misprint.

When that bullion changes hands, it may be the moment when power shifts from the rulers of yesterday to the rulers of tomorrow. This is what happened a century ago, when plenty of that French, German and British gold ended up in the hands of the United States.

In the very short term, this may keep downward pressure on gold. The people who hold the world's gold at the moment need cash, and may have to sell.

In the medium to longer term, it ought to be bullish.

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Many people have been puzzled over the last few months by gold's /quotes/zigman/656382 GC2G +0.66% behavior. It has tumbled since the start of September from around $1,900 an ounce to below $1,600. This has happened even while a financial crisis has erupted in Europe which, says traditional analysis, should be bullish for gold.

But there are a couple of other factors at play.

First: Gold hasn't fallen as far as it looks. The gold price is typically quoted in U.S. dollars. Yet in the past four months the dollar has rallied.

At the start of September, when gold touched $1,900 an ounce, the dollar was $1.45 to the euro. Since then the euro has slumped to $1.30.

Net result? Gold, which traded at around 1,300 euros per ounce back then, has declined to 1,200 euros per ounce now.

The second factor: Sentiment.

Four months ago, sentiment was massively bullish on gold. It had just skyrocketed, in the wake of the U.S. debt ceiling debacle. According to data published by the Commodities and Futures Trading Commission, speculators and traders had taken nearly record speculative bets that it would rise further.

This usually precedes a backlash, and so it has been.

Today? Sentiment is pretty bearish. The CFTC says the number of speculative bets on higher gold have collapsed by more than a third.

Last week Reuters polled 20 hedge fund managers, traders and economists, and found them very bearish. Most expect gold to fall below $1,500 next quarter.

Generally speaking, in the markets, you are better off betting against the consensus than with it. Four months ago everyone was bullish on gold, at $1,900 an ounce or more. Now they are bearish at $1,560. Do the math.

Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.