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One of the
most important assets of the German people is the gold that has been
accumulated over the years through their hard work and savings. Individuals hold
some of this gold, but much of it is kept with the Bundesbank
as an essential rainy-day reserve, held just in case monetary turmoil
requires its use to re-establish a stable currency.
This gold
has been entrusted to the Bundesbank and provides
peace of mind knowing that it is there. But where is it really? And just as
important, how much is there? Unfortunately, we do not know the answer to
these questions.
The Bundesbank’s latest Annual Report states: “As
of 31 December 2009, the Bundesbank’s
holdings of fine gold (ozf) amounted to 3,406,789
kg or 110 million ounces. The gold was valued at market prices at the end of
the year (1 kg = €24,638.63 or 1 ozf =
€766.347).” The total value therefore reported by the Bundesbank on its balance sheet is €83,939 million.
There have been, however, repeated claims suggesting that the Bundesbank's gold vault is empty. The reporting by the Bundesbank in its Annual Report does nothing to disprove
these claims.
The Annual
Report states that the Bundesbank owns
€83,939 million of “Gold and Gold Receivables”.
Surprisingly, it does not distinguish between these two fundamentally
different assets, nor does it report how much of each it owns.
Clearly,
gold stored safely and securely in the Bundesbank’s
vault in Frankfurt has a different level of risk than gold that has been
loaned out. Physical gold is a tangible asset, and therefore does not have
counterparty risk. But a loan – regardless whether you are lending
euros, dollars or gold – is only as good as the creditworthiness of the
borrower. This lesson was learned the hard way, for example, by the central
bank of Portugal. It had loaned gold to Drexel Burnham Lambert, and that gold
receivable was still outstanding when this bank failed two decades ago.
By not
reporting “gold in the vault” and “gold receivables”
separately as two different assets, the Bundesbank
is saying in effect that cash and accounts receivables are the same thing. Of
course they are not, and their fundamental difference is made clear by
Generally Accepted Accounting Principles, which highlights a deficiency in
the Bundesbank’s Annual Report.
Section
26(2) of the Bundesbank Act states: “The
accounting system of the Deutsche Bundesbank shall
comply with generally accepted accounting principles.” By reporting “gold
in the vault” and “gold out on loan” as one item, the Bundesbank is not reporting its two different gold assets
according to generally accepted accounting principles.
There have
been reports that the Bundesbank believes the way
it accounts for gold is required by International Monetary Fund rules, which
they contend supersede Section 26(2) of the Bundesbank
Act. But if so, one can reasonably ask, who controls the Bundesbank?
The German people or the IMF? Until these questions are answered, the public may
never learn how much gold the Bundesbank has stored
safely and securely in Frankfurt, and how much it has loaned, thereby
perpetuating the rumour that the Bundesbank's gold vault is empty.
Given the
ongoing monetary turmoil and the growing worries about the inflationary
impact of rising commodity prices, those rainy-day gold reserves may soon be
needed. So when will the Bundesbank provide an
accurate accounting of Germany’s gold reserves?
James
Turk
All data and quotes sourced from Reuters. Originally Published by Goldmoney. All rights reserved.
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