Wednesday, January 16, 2013

Germany Wants its Gold Back

On Monday The German paper Handelsblatt reported that the German central bank would repatriate its gold holdings from Britain, France and the US. When I originally read this story on Zerohedge I was shocked. The ramifications and questions this raises are many. But first, some may wonder why the nation with the world's second largest gold reserves has been keeping their hoard of gold abroad.

Germany's gold
After World War II, Germany rebuilt its country with assistance of the US Marshal Plan. In West Germany, the Bundesbank (Federal central bank) accumulated new gold reserves as their wealth increased. They accumulated gold because the international financial system after WWII, the Bretton Woods system, required currencies, at a fixed exchange rate, to be backed by gold. Each country held gold at the other country's central bank to settle international trade. Because the US emerged as the largest economic power, much of the developed world kept large amounts of gold on deposit at the US Federal Reserve to more easily facilitate transactions with their largest trading partner. In addition, West Germany had additional concerns during the Cold War. If West Germany was overrun by the Soviets their nation's wealth would be at risk. Therefor, most of it was kept in the US with some in both London and Paris. Bretton Woods ended in 1971 when the US Dollar was no longer backed by gold at a fixed rate. West Germany maintained their gold deposits in the US primarily for political reasons.

Loss of Trust
So why is Germany repatriating their gold now? Its either for political reasons or something much bigger.Here's what they say:

From the Bundesbank:
By 2020, the Bundesbank intends to store half of Germany’s gold reserves in its own vaults in Germany. The other half will remain in storage at its partner central banks in New York and London. With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.
The following table shows the current and the envisaged future allocation of Germany’s gold reserves across the various storage locations:
31 December 2012 31 December 2020
Frankfurt am Main 31 % 50 %
New York 45 % 37 %
London 13 % 13 %
Paris 11 % 0 %

To this end, the Bundesbank is planning a phased relocation of 300 tonnes of gold from New York to Frankfurt as well as an additional 374 tonnes from Paris to Frankfurt by 2020.
The withdrawal of the reserves from the storage location in Paris reflects the change in the framework conditions since the introduction of the euro. Given that France, like Germany, also has the euro as its national currency, the Bundesbank is no longer dependent on Paris as a financial centre in which to exchange gold for an international reserve currency should the need arise. As capacity has now become available in the Bundesbank’s own vaults in Germany, the gold stocks can now be relocated from Paris to Frankfurt.
 But as Zerohedge points out:

So it took the Bundesbank over 10 years to figure out that "the Bundesbank is no longer dependent on Paris as a financial centre in which to exchange gold for an international reserve currency should the need arise."
Well, as long as it has nothing to do with the recent political schism between socialist beggar France and the only country left in Europe that is not an all out parasite, all is well.

Of course, it was just last November that Andreas Dobret from the German Bundesbank said this:

Remarks on German gold reserves

Please let me also comment on the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany – a discussion which is driven by irrational fears.

In this context, I wish to warn against voluntarily adding fuel to the general sense of uncertainty among the German public in times like these by conducting a “phantom debate” on the safety of our gold reserves.

The arguments raised are not really convincing. And I am glad that this is common sense for most Germans. Following the statement by the President of the Federal Court of Auditors in Germany, the discussion is now likely to come to an end – and it should do so before it causes harm to the excellent relationship between the Bundesbank and the US Fed.

Let’s get back to facts and figures: I would like to remind you that our gold reserves are part of the German currency reserves. These were accumulated over time thanks, in part, to Germany’s economic boom in the 1950s and 1960s. Germany’s growing economic strength, especially its strong external position, resulted in rather large trade account surpluses, most of them acquired in US dollars. At that time, the International Monetary System, known as the Bretton Woods System, was dominated by the US currency. As long as this system was in force, which was up until 1971, the US Fed was obliged to exchange its currency for gold.

Any current account surplus thus resulted in an increase in Germany’s gold reserves. This gold was stored in US vaults for obvious reasons [ZH: sorry, we don't have an econ PhD: what are the "obvious reasons"?]. This was not only the case for the gold hold by the Bundesbank – it was, in fact, common practice. By the way: it was the only practical thing to do, since running a trade account deficit meant a decrease in gold stocks.

Thus, we are now looking back at sixty years not only of fruitful cooperation in many fields and international fora, but also of storing gold and trading via the New York Fed. As a matter of fact, it is sensible for us to do so in New York, as Frankfurt is not a gold trading venue.

Throughout these sixty years, we have never encountered the slightest problem, let alone had any doubts concerning the credibility of the Fed [ZH may, and likely will, soon provide a few historical facts which will cast some serious doubts on this claim. Very serious doubts]. And for this, Bill, I would like to thank you personally. I am also grateful for your uncomplicated cooperation in so many matters. The Bundesbank will remain the Fed’s trusted partner in future, and we will continue to take advantage of the Fed’s services by storing some of our currency reserves as gold in New York.

At the same time, you can be assured that we are confident that our gold is in safe hands with you. The days in which Hollywood Germans such as Gerd Fröbe, better known as Goldfinger, and East German terrorist Simon Gruber, masterminded gold heists in US vaults are long gone. Nobody can seriously imagine scenarios like these, which are reminiscent of a James Bond movie with Goldfinger playing the role of a US Fed accounting clerk.

While gold is important, we have to combat a crisis of confidence in the euro area. This is the task we need to concentrate on. And we will do so.

Thank you for your attention.
So what changed? What does Germany know now that they didn't know then? You may recall back in July I posted Are the Gold Vaults Empty? where I examined how even relatively small clients had difficulty getting their physical gold from banks. Is Germany worried about getting its gold back? Is it just preparing for a new currency regime after the Euro and the US Dollar collapse? Perhaps this is why Germany is giving the Fed seven years to deliver the gold. But why? Isn't the gold just lying around in the vault?

Once again, from Zerohedge:

Stephen Leeb talking to KWN thinks he knows why:

So Germany has asked for the gold stored at the Fed to be returned to Germany.  The amount of gold the US supposedly has stored for the Germans is 1,536 tons.  This can certainly be shipped to Germany.  Yet it’s going to take 6 or 7 years to return a small portion of the gold to Germany?  Why?

They ship much more oil than gold.  This is ridiculous.  What do they expect?  Do they expect the gold to blow up?  Last I heard gold doesn’t even oxidize or even tarnish, much less blow up.  Why can’t they just load it on a ship or on planes and send it?  Something doesn’t add up here, Eric.

The reality here is that the German gold has been leased out and it’s not sitting in the vault.  So the Fed has agreed to return very small portions of the German gold each year, which is supposedly stored at the Fed.  Well, the gold isn’t there and that’s why it is going back to Germany in small portions each year.

People also need to remember gold is not going down much, because the US doesn’t have enough to sell.  The problem is what you sell in the physical market, you have to deliver.  At a certain point, the US will run out of other countries gold to sell.  The US will reach a point where they have to hope that the gold price doesn’t start to really fly.

There is a strong bid for gold every time it goes down.  When the cat gets out of the bag, and I think the Germans are helping the cat get out of the bag, at a certain point when all of the gold moving from West to East is stopped, the price of gold will really begin to ramp up in price.

Where will the gold come from to satisfy the demand?  Where will the gold come from to send back to Germany?  And do you know what the Chinese will say?  They will say, ‘OK, we will let our banks hold the yuan, but in contrast to your dollar, our yuan will be backed by gold.’ 

What will countries prefer to hold, the yuan, backed by gold, or the US dollar, which is backed by absolutely nothing?  So we are now getting to a situation where we are getting close to the end game.”

I'm sure I'll be writing more on this in the future, but that's all for now.

No comments:

Post a Comment