Gold and Italy's Financial Worries

Gold Investing News, Damon van der Linde

Insecurity over Italy's financial stability and sinking confidence in the country's government have made Italy the latest target of Euro Zone contagion fears. These concerns have called into question what role investment in gold will hold as a traditional safe-haven against inflation.

"I think there is great danger in gold being unloaded in specific countries in this problem, and very specifically Italy, which has a huge amount of gold not only as a percentage of the reserves, but the tonnage is one of the largest," said Jon Nadler, a senior metals analyst at Kitco. "This is the very purpose you keep gold in the basement for the rainy day when you need absolutely to raise cash."

The European Union is currently in the midst of talks to help determine solutions to Italy's debt crisis, which is currently at 120% of gross domestic product (GDP), the second highest in the Euro Zone after Greece. This has prompted EU discussion encouraging the Italian government to pass an austerity budget to demonstrate its initiating reforms.

"The most important part is what happens with the various economies and how, with the austerity measures, translate into social problems, if any. That's where the danger really lies," said Nadler.

According to the June 2011 statistics from the World Gold Council, Italy holds 2,451.8 tons or 71.9% of its total reserves in the gold. In 2007, when Italy's debt was 107% of the GDP, the country sold gold reserves to relieve the financial troubles. Nadler suggests that rather than selling gold reserves, Italy should consider using the metal as collateral while a more long-term solution can be achieved.

"There is nothing easier to reach for, nothing more liquid, nothing easier to pledge to the IMF or European Union than gold," said Nadler.