The threat from debt

Having given away trillions of their particular fiat currency during financial crashes and viral pandemics, some governments now want to grab it back.

That seems to be what may be on the cards in Italy, the country declared a "flawed democracy" by the Economist Intelligence Unit in 2024. Italy's 2,542 tonnes of gold - the fourth highest reserves after those of the US, Germany and the International Monetary Fund (IMF) - are now threatened with changed ownership.

Politicians from Prime Minister Georgi Meloni's party, the Brothers of Italy, want to add a provision to an upcoming Italian Budget law that would define those gold tonnes (currently the property of and managed by the country's central bank) as belonging to "the Italian people". In the words of the chief whip of Brothers of Italy, "that gold has always been a property of the people of Italy".

That doesn't mean each Italian citizen would be given a share of the gold. It means that Italian state should take control of the gold instead of the central bank.

Like most countries today, Italy has a chunky national debt of about €3 trillion ($3.07 trillion), which is about 135% of its gross domestic product (or GDP), which is one of the highest debt ratios of big European economies. Italy annually pays around 4% of that GDP in interest on its debt, about €90 billion ($98 billion).

That huge bill isn't as bad as some. America's national debt is now approaching $38.5 trillion (almost €33 trillion), for which it pays almost $1 trillion interest, ten times more than Italy pays. America's debt is also growing faster. While it took nine months to move from $36 to $37 trillion, it took just 71 days to grow another trillion. The next trillion will be notched up even faster.

Not so fast

Plans to use gold to pay government bills that have been carelessly run up have been around in Italy for a while. In November a scheme was floated under which Italian citizens would be encouraged to declare their 'undocumented' gold to the state, have it valued and then pay 12.5% tax on its value. That thinly-disguised theft has fallen on deaf ears.

There isn't an accurate estimate of Italy's private gold holdings. Unofficial estimates think there might be 5,000 tonnes, one of the world's biggest private holdings.

Italian families have traditionally built up their gold reserves as protection against the relentless devaluation of the Lira, Italy's fiat currency prior to it joining the Euro in January 1999. In 1862 there were 5 Lire to the US Dollar; by 1999 a single Euro was valued at 1,936.27 Lire.

Italian government seizure of the country's gold reserves won't happen without a fight. Christine Lagarde, president of the European Central Bank (ECB), has said Italy's central bank is no different from any other national central bank. The ECB wants to protect the autonomy of all the European Union member central banks, including Italy's.

Handing over Italy's gold - currently worth around $300 billion - to Italy's politicians so they could cut debt would not only break current EU law. It would also undermine monetary stability in the EU and possibly threaten the Euro.

An idea that may spread

Though the Italian idea on its gold reserves already looks dead in the water it may set other politicians thinking. Sovereign debts in relation to GDP are for many countries at their highest since the end of World War 2. They are bound to get higher still.

One reason is that mental health problems among young people (aged 18-25) has jumped by 63% since since 2009. The costs of this - welfare payments, failure to work - are astronomical and are only likely to grow.

Growing mental illness is only one expanding problem facing politicians.

If Italy's politicians see their country's gold reserves as a potential life-saver, what's to stop others, in other countries, from thinking the same?

Nothing.

Perhaps America's politicians might see the sale of their country's 8,133 tonnes as a way of cutting debt? Maybe Germany's 3,352 tonnes could come under the hammer? Rumors are that Russia has been selling some of its 2,332 tonnes as a useful way of helping pay for its Ukraine war.

Whatever politicians decide to do with their country's gold reserves, it should not alarm gold holders. Quite recently gold reserves were under attack, with the sale of half of the UK's gold reserves in the late 1990s. The Swiss National Bank (SNB) sold gold during 2000-2009. Gold prices fell at what was seen as bad news.

Today we have real bad news, with wars, conflicts, global upsets all coinciding. Gold has benefited from this genuine alarm.

In December the US Federal Reserve is almost certainly going to cut US interest rates once more, which will boost the gold price.

Next year the Federal Reserve will have a new head. President Trump looks like appointing Kevin Hassett, a man who will not please Wall Street. Perhaps Hassett will consider doing something with some of the US gold reserves.

Whatever is done, we need to remain calm, confident that ownership of gold is the most sensible way of protecting our assets. And that Glint is the most sensible - and one of the least expensive ways - of holding that gold.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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