German Gold Claw Back Causes Concern by John Browne | January 24, 2013
Last week the Bundesbank (the German central
bank) surprised markets around the world by announcing that
it will repatriate a sizable portion of its gold bullion
reserves held in France and the United States. To many,
the news from the world's second largest holder of gold
signaled a growing, if clandestine, mistrust among central
banks, possibly fueled by diverging policy goals. The Germans
have attempted to tamp down the alarm by highlighting the
myriad of logistical, practical and historical reasons that
qualified the announcement as unremarkable. But the size,
scope, and timing of the move makes it hard not to draw
more strategic conclusions.
Coming during a time of supposed central
bank cooperation, the decision to withdraw billions of dollars
of bullion was bound to raise eyebrows. At present, Germany
has official gold holdings of some 3,396 tonnes. 1,500 tonnes
resides in New York and 374 tonnes in Paris. Between now
and 2020, Germany will repatriate 674 tonnes of gold - 300
from the Fed in New York (valued at $17.9 billion) and the
entire 374 tonne allotment from Paris (valued at $22.3 billion).
Although financial leaders like Fed Chairman Ben Bernanke
have said that gold "is not money" and senior
investors like Warren Buffet have described it as "a
barbarous relic," the movement of gold nevertheless
makes a strong emotional impact. Is such a response justified?
Coming during a time of supposed central
bank cooperation, the decision to withdraw billions of dollars
of bullion was bound to raise eyebrows. Although financial
leaders like Fed Chairman Ben Bernanke have said that gold
"is not money" and senior investors like Warren
Buffet have described it as "a barbarous relic,"
the movement of gold nevertheless makes a strong emotional
impact. Is such a response justified?
Following World War II, the threat of a
sudden Soviet invasion convinced many Western European nations
to diversify their gold holdings abroad, particularly overseas
to the U.S and the UK. Today, Germany holds only 31 percent
of its gold within the Bundesbank. Of the remainder, 45
percent is held at the Federal Reserve Bank in New York,
11 percent with the Banque de France in Paris, and 13 percent
with the Bank of England in London. But now that the Russian
military threat has dissipated, the Germans have rightly
reevaluated its dispositions.
For decades, central banks have been secretive
about their gold holdings. Despite this, few doubt the published
aggregate gold holdings of central banks. But serious questions
arise as to the precise ownership of the gold held in the
vaults of central banks and some commercial banks. To the
astonishment of many German citizens and international observers,
the Bundesbank admitted some years ago that it had not held
an audit of its gold holdings for decades, if ever. (See
my prior commentary on this subject)
The developed nations of the world have
adopted a form of Keynesian economics that has created a
world awash with debased fiat currency supported by seemingly
unsupportable mountains of official debt. In such a world,
it is understandable that German citizens feel their nation's
gold should be held at home. Such sentiment could spread.
Holland's CDA Party already has asked that their nation's
612 tonnes, or metric tons, of gold be repatriated from
the U.S., the UK and from Canada.
Some question whether such sentiments will
spread and expose even a shortage of physical gold in hitherto
trusted vaults. In addition, in a world where trust in central
banks is waning fast, central banks themselves may become
mistrusting of each other.
At the same time, central banks in the developing
world, particularly in China and Southeast Asia, are accumulating
gold, as are nations like Russia, Turkey and Ukraine. China
is now the world's largest producer of gold worldwide, but
she retains her production and even buys more on the open
market. This has occurred even while no major central banks
are selling significant amounts of gold. The Bank of England's
disastrous selling campaign in the early years of the current
century, in which it sold hundreds of tons below $300 per
ounce, is no doubt a controlling factor.
The unwillingness of central banks to part
with their hoarding of gold, highlighted by Germany's repatriation,
contrasts starkly with the central bank policies of the
1970s and 1980s, when concerted efforts were made to de-monetize
gold, which could only be done through active selling. Does
this change reflect a growing and shared distrust of fiat
currency by sophisticated private investors who hoard gold?
The repatriation of even a part of Germany's
central bank gold holdings, especially if followed by other
nations such as Holland, should be regarded with concern.
Today, no central bank would dare to risk rocking the central
banking boat. But as the Keynesian economies have slid towards
financial disaster, any increase in central bank gold repatriation
could indicate a real fear by the great insiders - central
banks.
A particularly interesting aspect of the
announcement that has been largely ignored is the extraordinarily
lengthy seven year time period in which the Germans expect
to receive back their gold. The 300 tons they're repatriating
from the New York Fed reflects just five percent of the
more than 6,700 tons held there. It strikes many as unusual
that the Fed would need so much time to deliver what should
be a manageable withdrawal.