The Big Picture behind Germany Taking Half of Its Gold Home

By: Julian_DW_Phillips

Bundesbank announced last week that they'll repatriate 674 metric tons of their total 3,391 metric tonne gold reserves from vaults in Paris and New York to restore public confidence in the safety of Germany's gold reserves. The transfer from the Federal Reserve is set to take place slowly over a seven year period and will only be completed in 2020.

The Bundesbank, the central bank of Germany is to store half of its gold reserves in its own vaults in Frankfurt.

It is planning a phased relocation of 300 tonnes of gold to Frankfurt from New York and 374 tonnes to Frankfurt from Paris by 2020.

In doing so, the Bundesbank will have 50% of its gold reserves in Frankfurt, 37% in New York and 13% in London.

The Bundesbank said that it is focusing on the two primary functions in relocating its gold reserve, to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time.

Germany is the second largest gold holding country with 3,391.3 tonnes, behind the US with 8,133.5 tonnes.

Germany's central bank will repatriate part of its $200 billion gold reserves stored in vaults in the Federal Reserve in New York and the Banque de France in Paris.

Before German reunification in 1990, 98% of Germany's gold was stored abroad. The Bundesbank then started to bring its gold home and in 2000 transferred 931 tonnes from the Bank of England to Germany. It will continue to hold about 13% of its gold reserves in London, even after 2020.

With the introduction of the euro (12 years ago) the Bundesbank sees no need to hold any reserves at the Banque du France as it will no longer need them there for exchange for foreign currency, after all France uses the same currency now.

"This is above all a historical anomaly which is now being corrected," said David Marsh, chairman of think tank OMFIF, which issued a report earlier this month in which it foresaw growing importance for gold due to uncertainty stemming from the rise of China's Yuan as an alternative to the dollar.

Why?

• There have been widespread stories that the Fed does not have the gold to return as gold held for governments is usually, 'unallocated'. This suggests that the German gold reserves were not 'allocated'. Ordinarily, central bank monetary reserves should be held in an 'allocated' format to evidence to whom they belong. As it is, held in an 'unallocated' form, in simplistic terms, this means that should the Fed fail, foreign central banks holding their gold there would be that unsecured creditors. This concern has been voiced inside Germany. It has been noted that the gold of Germany has not been audited in the past and it should be, on a regular basis. The German Court of Auditors told legislators that the gold had "never been verified physically" and ordered the Bundesbank to secure access to the storage sites. It called for repatriation of 150 tons over the next three years to test the quality and weight of the gold bars. But Germany has decided to move more than in this recommendation. It is said that Frankfurt has no register of the numbered gold bars.

• We noted that it is going to take 7 years or 10 shipments a year to move it to Germany. This is odd because it can be done much faster. Are they allowing the banks from which it is being drawn to pull it back from those to whom it has been leased? If this is the case and they have to go out and buy the gold to supply Germany with, will we see the three central banks [the Fed, the Bank of England and the Banque de France] enter the open gold market as buyers of the gold they can't access in that time or has seven years been decided on because this matches the maturation of the leases?

• The function of gold reserves is to ensure the flow of trade in such critical times that it is the last remaining asset a nation has that is acceptable to overseas creditors, when other national assets fail. As Greenspan put it, it is 'money in extremis'. But is it necessary to keep all a nations gold outside the country for this purpose? The decision to repatriate half the gold only leaves gold available in the world's financial centers for such purposes, while the gold held at home is available to be sent elsewhere. The problem of holding gold at home is that if it is needed for creditor payment it resides in the jurisdiction of the debtor, not a happy position.

• As we said above, it appears reasonable to think that as France is in the same currency, there seems little point in holding any of Germany's gold in France. With the U.K. still using the pound sterling, keeping Germany's gold there still makes sense. The same applies to the U.S. which remains the wealthiest nation in the world, at the moment.

• Are the nations where the gold is held the right places to store it? What if they face crises themselves? Is the move being made because of expectations of crises in those countries? What future monetary scene did Germany see that prompted the moves we see now? Nearly all the world's nations are acknowledging that China is headed to the top of the wealthy nations pile and is going to take the Yuan to a major global reserve currency, but the prospect of holding German or any other developed nation's gold in the People's Bank of China takes a leap of faith and an admission that power and wealth has moved East into politically unknown waters that is just too much at this time.

As we said above, the move of this gold to Frankfurt will allow time to ensure the central banks where the gold is held, to get hold of the gold if they do not have it at the moment. The prospect of developed world central banks now competing with those of the emerging world in the gold market may well start the next leg of the gold bull market because this new, persistent, price-insensitive buying has the power to take gold to a whole new level! We watch to see. If this does happen, then the whole nature of gold in the money system will change even before the changes are 'officially' accepted. Gold will be in a 'de facto' pivotal position in the monetary system again. It will be a short time from that point before it is 'officially' accepted then. The way will have been paved for China to arrive on the scene and gold to have a vital function in the monetary system between two very different and unconnected, politically and economically, power blocs, the developed world and the emerging world with China as its hub.

The last time the world was divided on this basis was at the start of both world wars. The consequences to the monetary world then were so devastating and saw the destruction of national currencies on both sides, in Europe.

History teaches us another lesson. Ahead of the second war, when it became apparent that extremists had taken power in Germany and war became a probability again, gold came into the picture very forcefully. We are all aware of the 1933 confiscation of gold then, with the stated objective of expanding the money supply through the devaluation of the dollar in the U.S. but one side of that event has not been the subject of full public examination.

What happened to European Gold from 1935+?

Is the fear of future crises in those countries a motive for the move of Germany's gold back home? It certainly was so in Venezuela's case, fearful of the U.S.'s power over its gold and reserves. We don't expect any further statement on the reasons from Germany because that's the nature of central banks. But history tells us that there are other reasons which discount the future. These confirm the move of gold back to the monetary system and why confiscation of private gold has become a probability in the future too.

When the U.S. dollar was devalued in 1935, it was done so only in terms of gold. It was not devalued against foreign currencies. Exchange rates were then fixed against each other. Other governments did not devalue their currencies against gold. The result was that while gold was trading outside of the U.S. in the foreign currency equivalent of $20, there it was trading at $35 in the U.S.

With markets relatively unsophisticated in those days, alongside limited communication abilities the original "arbitrageurs" [dealers between two markets] found they could buy gold at the foreign currency equivalent of $20 and sell it into the U.S. for $35. Is it any wonder that they U.S. gold stocks roared up to 26,000± tonnes?

Was this a financial error in an undeveloped world? We have no doubt it was not. It was the ideal quick way to shift the gold reserves of Europe away from the war zone to the relative safety of the U.S. The war arrived in Europe four years later.

But foreign governments weren't stupid. European governments permitted this move, even though it was seen as a market event. Remember that gold was the basis of money then so such a shift had to happen with government approval. This had to happen within the monetary system in force at the time. The fact that it happened so smoothly implied total government cooperation.

We see it also as an example of how the banks work completely with monetary authorities to ensure complete control over the monetary system. The same is true today as we see the efforts of governments primarily directed at repairing the banking system and government finances with scant attention to the national economies below them.

With a war on the way Europe sent its gold to the U.S. without governments being seen to do it. The move came about as a result of 'market forces'.

But you may rightly say that surely that wasn't the end of the story? Of course not!

With a huge U.S. army based in Europe after the war, the flood of dollars from the U.S. to Europe happened from the forties right through to the sixties [Eurodollars] continued. European nations, including France, Italy, Switzerland and Germany led by President de Gaulle, kept selling their U.S. dollars for gold. Once Europe's gold returned to it [as the war was out of the way and reconstruction just about complete], Europe had its gold back. Then the change in the monetary system changed and the dollar, the exclusive currency in which nations could buy their oil to run their economies with closed the gold window and excluded gold from the day-to-day system but remained in national vaults. It was then that the experiment, now 42 years old, in un-backed paper currencies began. European central banks were then rewarded by the extraordinary rise in the gold price in the seventies and eighties.

This two-way process of gold to and from the U.S. only became visible with hindsight.

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By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

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