German Gold Claw Back Causes Concern
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 US 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.
John Browne is a Senior Economic Consultant to Euro Pacific Capital.
Posted by Bischoff on 01/24/13 12:39 AM
"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."
Yes, John Maynard Keynes, the very same man who in 1914 took bets at King's College in Campbridge that the First World War wouldn't last more than six month, because by then all the gold reserves to finance the war would have been exhausted. Why was he so sure... ???
Because, he knew that the value created by producing war materials was not cleared in the consumer markets, but it was taken to the battle field and blown to smithereens. The only thing which could offset such a waste or dissipation of value was the value of gold itself. The much more interesting story is why it came to a World War in the first place.
The Germans and their high level of productivity played a major role in the world economy then, just as they seem to play a major role in today's world economy.
World commerce during the second half of the 19th Century was based on the gold standard. International Bills of Exchange were cleared in London and gold reserves moved accordingly. As the home of the industrial revolution, the British empire enjoyed a preeminent position in world trade, which by the turn of the 20th Century was being challenged by Germany. Through new inventions in science and technology, along with numerous patents held by German industry, the Germans became the premier producers of chemicals, pharmaceuticals and dies.
When in the late 1800s the British discovered unusually rich gold finds in the South African Transvaal, instead of letting the freshly mined gold circulate in world commerce, which would have temporarily benefitted Germany and their new industries, the British locked up the Transvaal gold in the vaults of the Bank of England, thereby denying it to flow to German through trade.
The German government retaliated by restricting their gold flows by creating an irredeemable Reichsmark with which it payed government employees. France followed to do the same. Consequently gold flows to clear international bills of exchange slowed and world commerce was strained.
When politics didn't keep pace with the need for a common standard for currencies (meaning unrestricted gold flows)to accomodate world trade, and when politicians ignored the dangers embodied in an unrestrained use of new weapons technology, it is no wonder that the world erupted in the confligration which became WW I.
The British and the French did defeat the Germans with help of the Americans. The imposition of reparations on Germany set out in the Versailles Treaty were down right onerous. It forced Germany to hyperinflate their currency. They had just about pulled out of the downward spiral of hyperinflation by installing a redeemable parallel currency, when the politics in Germany allowed a Hitler to be elected Reichschancellor.
Having fought in WW I, Hitler's politics, and that part of WW II directed by Germany against the Western Allies was entirely based on revenge.
Hitler lost, and so did the German people which followed him.
When after WW II, at the creation of the Bundesrepublik, the West Germans wanted to create the Deutsche Mark based on the gold standard, the U.S, nixed the idea.
The gold standard had prevailed in the U.S. until 1933 when FDR nationalized the gold holdings of American citizens. With the Banking Act of 1935, the U.S. currency circulating domestically became a "managed" currency. For circulation after 1935, the U.S. currency was based on the bullion standard, which meant that the U.S. Treasury would buy from and sell to foreign banks any amount of gold at $35 per ounce. This bullion standard was affirmed by the U.S. in the 1944 Bretton Woods Agreement.
On August 15, 1971, President Nixon reneged on the Bretton Woods Agreement by suspending the selling of gold at a fixed rate. This ended the connection of any currency in the world to the value standard presented by gold. Since 1971, all currencies in the world are "managed" currencies, and their value float against each other in the FX markets.
After witnessing the conflagration which was WW I, Keynes changed his mind as to the ability of the gold standard to keep peace in the world. His General Theory of Employment, Interest and Money is nothing but an advocation for government management of the economy and currency with the goal of preventing war. When the flaws in his theory were pointed out, and it was demonstarted to him that in the long run this theory cannot work, his reply was that, "in the long run everybody dies."
Now, we are witnessing the proof of the flaws in Keynes' theory. Yet governments and their bureaucrats throughout the world, many of which were forced into the Keyensian system by the U.S., i.e. Japan, China among a host of others, are still practicing in Keynsianism.
Germany, though unable to put the Deutsch Mark on the gold standard in 1949, protected the German currency by constitutionally limiting its inflation. This constitutional provision is now being undermined by the ECB and by the refusal of Eurozone countries to abide by the Maastricht Treaty.
Germany sees itself put upon again by others to share part of their productivity and hard work by being asked to guarantee any government bond denominated in Euros.
The problem with Keynesians, and Friedmanites for that matter, is their believe in the viability of the Quantity Theory of Money. Eighty some years of Keynesianism throughout the world has proved that it doesn't work for the betterment of society in the long run. While it may initially lift a people from utter poverty, it does not provide for a sustained high living standard.
Beginning with the Bismarkian social arrangements in the late 1800s, Germany started to create a society which placed high importance on productive "work" to create the wealth with which to pay for educational, governmental and other services. The Bismarkian model based on a standard of value for the currency worked for the Germans then. The Keyenisian model based on the Quantity Theory of Money is at total adds with it.
I firmly believe that the German government under Angela Merkel is intent on returning to a currency based on a standard of value represented by gold. It is for that reason that they also split up the major banking giants like Deutsche Bank and Dresdener Bank recently. They are in the process of separating banking from investing.
To make a value based currency believable, the Germans have to show control over sufficient stocks of the standard of value which is gold. They have to appear capable and willing to redeem should they be called upon to do so.
The repatriation of German gold from France, England and the U.S. is done for that purpose. It is to demonstrate control over their gold reserves to bolster believe in a coming redeemable Deutsch Mark, and maybe in a coming redeemable EURO which would benefit of all of Europe.
The reason why the repatriation of German gold from the U.S. is protracted lies with the U.S. military ties with the Bundesrepublik. Besides, it no doubt accomodates the U.S. Treasury and the FED by giving them time to take stock of their leased gold arrangements.
Posted by dimitri on 01/23/13 08:14 PM
It's difficult to accept that this moving of huge tonnage of gold to and fro around the globe by various countries over the centuries has anything significant to do with the will of the people, the Germans, or Venezuelans or who have you. It's seems rather that the gold traffic is controlled by TPTB as part of their international chess game. And at the gold level the game is a bit more exclusive than the one that's played at the central bank level. Gold is for the ultimate high rollers. The rest is noise.
Posted by erikSF99 on 01/23/13 06:37 PM
Inibo, you got it. It's clear that all the gold was "leased out". It's gone. I'm not sure how the Fed is going to create more gold to ship back to the Germans. Maybe they'll just borrow it from other shelves in the vault. That is, if those other shelves have any gold either.
Hopefully Lars Schall will keep up his pressure. Nithsdale has it right:
"Europe, taking back the gold it can every time the Fed can put it together for repatriation, now has a leverage instrument of enormous power. The Fed will no longer be wrestling with printing money for refunding, it must buy gold now to save its reputation, its very life. Gold will go sky high!"
My question: who is going to take dollars from the Fed for real gold? Are there really such clever sellers out there? It seems that the Fed would have to hide behind other buyers.
Posted by goodrum on 01/23/13 04:47 PM
Could it be that Germany is taking 7 years to repatriate their gold in order to assay every ounce carefully???
Posted by nithsdale on 01/23/13 03:42 PM
The German demand for repatriation of its gold is a gambit to push the USA and France back into normal channels of finance. Forced by mounting public clamor in Germany, the officials there have decided to take this step at this moment because the Obama group really thinks it is in charge of the world's finances and is going wild with its "assumed power".
The Germans and the Netherlands, New Russia and some of the Balkan states are not enamored of government taking all, as the Obamites are. Having suffered terribly under messianic leaders, they are going in the opposite direction. The movement of Ron Paul, who called for the audit of gold here in the USA before anyone in Europe even thought about it, has not gone unnoticed by business intelligentsia there. The fact that Obama's victory was engineered, was not a great triumph, also re-inforces this action. People in the know in Europe are not swayed by our ridiculous media.
We have a problem on our hands that we can't manage. Europe, taking back the gold it can every time the Fed can put it together for repatriation, now has a leverage instrument of enormous power. The Fed will no longer be wrestling with printing money for refunding, it must buy gold now to save its reputation, its very life. Gold will go sky high! That serves Germany et al well too.
They say everything comes to those who wait, plan and scheme for it!
Posted by scousekraut on 01/23/13 08:58 AM
Apparently the French brought their gold back from New York by ship in the 1960s. The Bundesbank is claiming that they need to keep so much gold in New York in case they suddenly have to sell some of it for dollars. This is of course nonsense as New York is not a major physical gold trading centre. Its where they trade the paper variety.
Posted by jaeger on 01/23/13 08:21 AM
Does it really matter in which Central bank vault the gold is held? Don't they all have the same owner? It's possibly more significant as to the purpose of all the publicity this 'story' is recieving
Posted by inibo on 01/23/13 07:50 AM
"It strikes many as unusual that the Fed would need so much time to deliver what should be a manageable withdrawal."
It's hard to manage what you don't have.