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Despite
the fall in the gold price this week, those thinking
to buy gold bullion have been buoyed by talk of
Germany auditing and repatriating their gold reserves held abroad. Below, Jan
Skoyles looks at what this mean and says about the
country.
This
week few will have missed reports that Germany is getting closer to bringing
its gold bullion reserves home. Following questions asked in Parliament
earlier this year regarding the 3,396 tonnes of
gold bullion, federal auditors have now instructed the Bundesbank
to regularly inspect the gold bullion reserves held in the US Federal
Reserve, Bank of England and Banque de France.
Der Speigel also report that the Bundesbank
is planning to ship 150 tonnes of the gold reserves
from the New York Federal Reserve back onto home soil, over the next three
years. It is also only now becoming clear that the Bundesbank
reduced 1,100 tonnes of gold holdings with the Bank
of England to 500 tonnes between 2000 and 2001.
The
mainstream media coverage of Germany’s actions regarding their gold
reserves seems to have an underlying accusatory tone to it. It’s almost
as if by the Bundesbank openly admitting it is
looking out for its own finances, for its own
country and its citizens, it is being unpatriotic to the global cause of
pretending that a highly leveraged, fiat money, banker-centric,
government-spending driven economy is exactly how things work best.
Germany
isn’t the first country to ask questions about its gold, let alone
repatriate it. Switzerland is also raising plenty
of questions and Venezuela finished repatriating
their gold earlier this year. So what does repatriating the country’s
gold say about the sovereignty?
1. Changing geo-political landscape
There
are two geopolitical reasons for a country taking custody of another’s
gold; the first is for ease of transport for payment purposes, the second is
to protect the gold from geopolitical risk.
The
ease of transport for payment purposes can be argued to still be a relevant
reason, particularly given moves by China, India, Russia and Iran to make
gold payments for oil and wheat. However, the chances of the US, UK and
France demanding payments in gold
in the near future as they desperately try to prop up their own currencies is
unlikely, particularly as Germany is a successful export nation to these
countries. This was one of the reasons for Venezuela’s movement of gold
into Brazilian and Chinese custody – they’re trading partners
with useful exports and are more likely to accept gold.
Germany’s
gold was primarily kept in the US on account of the physical threat from
Russia. This seemed reasonable at the time; the US was the bigger and lesser
of two evils. The big guy in the playground can be an allay, for a time.
Much of
Germany’s gold held in the US has never made it to Germany; it started
life as German gold reserves in a US vault somewhere. This was on account of
the European country running trade surpluses between the 1950s and the end of
the Bretton Woods. German gold reserves between 1950 and 1971 went from zero
to 3,600 metric tonnes, in the same period US
reserves fell by 11,000 tonnes.
But the
threat no longer remains, so why hasn’t the gold been moved back to
Germany?
2. Do not trust the custodian country to keep track of it when lending
it out
Back in
the mid-1920s, the head of the German Central Bank, Herr Hjalmar
Schacht, went to New York to see Germany’s gold. However the NY Fed
officials were unable to find the palette of Germany’s gold bullion.
The Chairman of the Federal Reserve, Benjamin Strong was mortified, but to
put him at ease Herr Schacht turned to him and said ‘Never mind, I
believe you when you when you say the gold is there.
Even if it weren’t you are good for its replacement.’
Both
GATA and Bring Back Our Gold argue that central banks have either loaned or
“sold short” the majority of the country’s gold. As GATA found
out between 2008 and 2009 the Fed has gold-swap arrangements with foreign
banks but keeps them secret. This practice of loaning out gold is not
uncommon; it’s the worst kept secret ever. However as Zerohedge point out this can lead to the eventual problem
that no-one’s sure whose gold is whose anymore having been a sort of
pass-the-parcel for many years. There is now a debate as to whether Germany,
or anyone else storing gold in a central bank abroad, owns allocated gold or
is merely a ‘creditor’ on a metal statement.
The
fact that there has not been an audit of Germany’s gold for some time,
not since 1979 in the New York Fed, gives some validity to GATA and
others’ concerns. Added to this the refusal by the Federal Reserve to
conduct an independent audit of the gold reserves in Fort Knox, as campaigned
for by Dr Ron Paul, and worries build as to whether
the custodian is ‘good for’ the gold.
3. Do not trust the custodian country to protect the value of their
own currency
As we
said in the first point, much of the gold was originally stored abroad for
safe keeping, particularly in regard to storing with the US Federal Reserve.
However as two round of QE have shown and the third just beginning, the US
aren’t even willing to protect their own assets in the long-term, so
are they likely to look after those of another country’s when they realise the rest of the world doesn’t want to use
their currency anymore.
Every
few months there is a discussion regarding what China are planning on doing
with the gold they both mine and import every year, with many believing they
are hoarding the metal as an insurance against the billions of US Treasury
bonds, notes and bills they hold. Many believe they will issue some kind of
gold-backed currency in the short-term and dump its one trillion
dollars’ worth of US Treasury securities. Whilst, at the moment the US
seem to take their monopoly currency for granted, should the Chinese or
anyone else behave in such a manner, the US will need to respond – most
likely with gold, which on its own it does not have enough of.
The
continual devaluation of the US Dollar is, of course, a good thing for the
gold price and therefore, even more reason for countries to get it back onto
home soil.
4. Foresee the need to protect the future of your own monetary system
Germany
is the one country in the Eurozone which appears to be reminding everyone of
how important it is to return to some resemblance of sound money. In the last
few months we have listened to Jens Weidmann,
President of the Bundesbank, compare the
ECB’s plans to the ‘Faustian Pact’. However, thanks to the
undemocratic nature of the Eurozone, fewseem to be
listening. Like many of the disagreements in the past, the ECB finds a way to
work around them or gently persuade member countries to support new measures
– such as Draghi’s OMT plans.
Germany,
like other countries in the EU, has a responsibility to protect its
citizens’ wealth and standard of living. At the moment this is being
threatened as the successful export country props up other fiscally different
countries to its own. Gold, as we have long said, is a protector of wealth.
The euro, many have said was designed to act ‘like a
gold-standard’ unfortunately you can’t dress up a fiat currency
to glister, as it seems the Germans have realised.
5. It’s yours, you want it where you can see it
As we
work hard to show here at The Real Asset Company, when you buy allocated gold
bullion, you own gold, only you can instruct what should happen to it. The Bundesbank, and Venezuela before it, has done nothing
wrong. This is despite mainstream coverage which wants to imply that the Bundesbank’s decision to move 600 tonnes of gold from the Bank of England between 2000 and
2001 was a ‘shock’ and ‘mystery’.
As we
have outlined above, no one really knows how this financial crisis will
unfold. Whilst financial crises have, unfortunately, become too frequent, in
the last forty years, never has one been this contagious, far-reaching or
beyond the understanding of the policy-makers. Why shouldn’t the Germans
get their gold back under control? They own it and most likely, they’ll
need it.
Jan Skoyles
Do you
think Germany should take her gold home? Tell us what you think in the
comments column below.
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Note: Information published here is provided to aid your thinking and
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