Germany is adamant that its gold reserves, the world's second largest, should not be used in helping bail out debt-ridden Eurozone economies. What are the arguments for and against?

In recent days we have heard that several G20 leaders of the world's major economies discuss the possibility of Eurozone countries pooling their borrowing rights at the International Monetary Fund to provide greater leverage for the EFSF. The Bundesbank holds Germany's Special Drawing Rights, secured by its gold reserves. Apparently, the proposal had caused tension between Bundesbank President, Jens Weidmann, and Finance Minister, Schaeuble, as well as between Weidmann and the ECB.

The Economy Minister of Germany stated that "German gold reserves must remain untouchable!". The Bundesbank and a spokesman for Chancellor Angela Merkel also ruled out the idea. This argument harks back to the time when the government and the Bundesbank argued over whether to sell some of Germany's gold in the second Central Bank Gold Agreement. At that time Axel Weber, the then Bundesbank President stated that gold in German foreign exchange reserves acted as a "counter to the swings of the U.S. dollar".

Prior to that, the head of the French central Bank, M. Noyer, had said that selling gold from the reserves was like "selling the family jewels". Unfortunately, President Sarkozy was Finance Minister at the time and forced the sale of 600 tonnes of French gold, a decision, we have no doubt he regrets to this day, because of the loss made by selling gold and buying U.S. dollars at the time. Then the gold was sold to support the advent of the Euro. Now the reason for the use of gold is very different.
As we have forecast for so long, gold's use is being advocated as collateral for Eurozone Sovereign loans.

Of course it is easy to commit someone else's gold to your cause, but a very different matter to get them to use it as such!

David Fuller's view I have mentioned the possibility of additional sales of gold by European central banks and / or the IMF on several occasions in recent months.

I assume that Europe will have to increase its bailout funds, one way or another. A possibility more frequently mentioned is a change in the ECB's mandate, allowing it to follow the US Federal Reserve's lead in printing money. I am sure Germany would oppose this as well.

Nevertheless, throughout the long, sad history of fiat money, most heavily indebted countries have eventually either defaulted or monetising a significant portion of their financial obligations.

I maintain that this is more likely to end with inflation rather than deflation in the west. Currently, these countries are mainly experiencing deflation in wages and asset prices such as houses, and inflation in commodities and services.