Perhaps the least talked about, most impactful news story of the past week came from the European Central Bank’s Mario Draghi and his mention of the current gold talks in Italy. Mr. Draghi made the following benign comment this past week:
“The ECB shall approve both the operations in foreign reserve assets remaining with the NCBs (national central banks) … and Member States’ transactions with their foreign exchange working balances above a certain threshold … The purpose of this competence is to ensure consistency with the exchange rate and monetary policy of the union.”
Without knowing any background, can you guess what he was talking about? To outsiders, the comment was odd. That is, until the Wall Street Journal started investigating.
The issue Mr. Draghi was referring to is big – really big.
Over this past week, a more than 60% majority of populist Italian politicians moved forward with a plan to shift ownership of the gold reserves held by the
Bank of Italy to Italy’s Treasury Department.
The moves are summed up in the following two statements made by the leaders of the 5 Star Movement and the League.
“One law would instruct the central bank’s owners, most of them private banks, to sell their shares to the Italian Treasury at prices from the 1930s”
“The other law would declare the Italian people to be owners of the Bank of Italy’s reserve of 245.8 metric tons of gold, worth around $102 billion at current prices.”
What’s the best way to describe this move but with a WOW!
The move is, of course, a fascinating gedankenexperiment– What if the Bank of Italy transferred all of its gold holdings to the Treasury?
The answer, of course, is that no one knows.
On a volume basis, according to the World Gold Council, the central bank of Italy has the fourth largest (third if you only count countries) amass of gold
reserves. The World Gold Council estimated that Italy’s holdings amounted to 2.5 thousand tons of gold, or about $102 billion.
Such a shift from the central bank to Italy’s Treasury Department would be incredible – unprecedented. Apparently, and this is only guessing, Italy’s politicians want to use some of the money for social spending.
What would happen if the Bank of Italy actually did transfer all of its gold reserves to the people of Italy?
Well, it certainly would not be an invited move from the perspective of Mr. Draghi and his financiers. It could cause a panic in the global financial system.
The Italian financial connections with the ECB would probably exhibit some strains in their relationship (which may or may not be a good thing).
Perhaps the more interesting question would be whether the Italian politicians would actually spend the money. It would certainly be hard for them to keep their hands off of $102 billion.
Of course, this is all thought experiments at this point in time. The ECB would almost certainly do everything in their power to prevent such a situation.
In a potentially market retelling move, politicians in Italy are planning on voting to require that the gold holdings of the Bank of Italy be transferred to Italy’s Treasury Department. The $102 billion transfer would almost certainly be noticed around the world. Any positive or adverse impacts in the aftermath of such a move are, of course, uncertain, but could be far-reaching.