The real reason Germany wants its gold back from France

Germany wants its gold back. The country is pulling a big chunk of the gold it has stored overseas back to Berlin. Matthew Partridge explains why - and how you can profit.

Germany wants its gold back.

The German central bank, the Bundesbank, is laying out plans to bring a big chunk of the gold it has stored overseas back to Berlin.

That's a lot of gold. In absolute terms, only the US owns more gold than Germany.

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Why does this matter? Well, for one thing, it suggests the Bundesbank doesn't trust other central banks to look after the country's gold.

But perhaps more importantly, it rather suggests that Germany has serious doubts about the ability of the euro to hold its value

Germany is repossessing its gold

As we've pointed out before, there have been long-standing concerns about the integrity of the gold market.

One theory held by pressure groups such as GATA (Gold Anti-Trust Action Committee) is that central banks have been trying to suppress the price of gold, largely to conceal just how bankrupt the fiat' monetary system is.

They have done this by secretly lending their stock to the market. This means that much of the stated physical stock of gold consists of paper claims to the gold, not the gold itself. In other words, there's a lot of double-counting going on.

GATA argues that there have been so many covert sales that the major vaults would find it impossible to cope with a sudden outflow of gold. Viewed from this perspective, Germany's action could be seen as an attempt to get ahead of any possible run on the vaults.

This story would certainly make a good thriller. It also fits with Germany's recent behaviour, which has included testing the purity of some of its overseas holdings.

However, like all such conspiracy theories, it's hard to either prove or disprove.

Moreover, there's a simpler explanation. German voters are worried that the euro is about to experience a drop in value. And the Bundesbank seems to agree with that view. So it wants to be sure that the country's hard assets are under its direct control.

In this context, it's particularly interesting that the Bundesbank is taking back every single one of the 374 tonnes of gold it has stored at the French central bank.

It's also taking about 300 tonnes back from the US, but it'll still have around 1,200 tonnes stored there. And Germany will still have some gold left at the Bank of England.

Sure, both the Federal Reserve and the Bank of England are "near gold trading centres" as the FT puts it. But we don't think it's too much of a wild speculation to suggest that in the event of a euro break-up, Germans would feel much more jumpy about France holding a chunk of their gold hostage, than the US or the UK.

The optimists are wrong on Europe

Now we don't expect the euro to break up entirely certainly not in the short-to-medium term. But it could get a lot weaker from here.

Despite all the optimistic statements from the likes of the European Central Bank (ECB) and others this year, the truth is that the economic outlook for the eurozone is poor. While the area is currently running a trade surplus (it exports more than it imports), surveys suggest that exporters expect things to get worse.

Even Germany is having a tough time. Ben May of Capital Economics points out that domestic demand is getting weaker, while trade is likely to reduce, rather than boost, growth in 2013. Overall, he thinks the German economy will contract by 0.5% this year.

That's all bad enough. But a bigger worry is the politics of the eurozone. The coming Italian election next month is a real wildcard. Italy's current leader Mario Monti may hold out hopes of leading a government of national unity, but this now looks increasingly unlikely.

Instead, the big choice is now between the populist Silvio Berlusconi and a coalition of left-wing parties. Both groups are anti-reform, and victory for either could see markets lose faith in Italy once again.

Meanwhile, Germany seems to be finally taking a tougher line on bailing out other countries. For the past year, the approach has been for Angela Merkel to talk tough, then finally allow just enough aid through to delay disaster until later.

However, for the first time, pressure from all parties has forced Merkel to refuse the latest casualty, Cyprus, an immediate bail-out. This is now likely to be delayed until March at the earliest.

With economic pressure increasing, and the potential for nasty political surprises, the ECB may end up having to step in once again. If it has to make good on its promise to do "whatever it takes", then this would hit the value of the euro.

Profit from money-printing in the eurozone

There are several obvious ways to benefit from this. One way, of course, is to do what the Germans are doing, and get yourself some gold. My colleague Dominic Frisby looked at the current state of the gold market in yesterday's Money Morning: Every gold investor should watch these numbers like a hawk.

And as we've mentioned several times in the past, if you've an appetite for risk, you might also want to buy into the cheapest eurozone markets. They'll be the ones that benefit most if the ECB starts up the printing presses.

If neither of those appeal, another perhaps less obvious idea is to consider buying into Swedish banks. JP Morgan's Stephen Macklow-Smith points out that tough regulations following the banking crisis in the early 1990s means that they are the best run in Europe, with very high capital buffers.

A weaker euro should also boost the Swedish krona. One option is Nordea (STO: NDA) which currently trades at just under ten times earnings. Saxo Markets offers access to the Stockholm Stock Exchange for retail investors.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri