announced last week that theyll
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 Germanys 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
Germany is the second largest gold holding country with 3,391.3
tonnes, behind the US with 8,133.5 tonnes.
Germanys 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 Germanys 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
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 Chinas Yuan as an alternative
to the dollar.
·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
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 cant
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 worlds 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 Germanys
gold in France. With the U.K. still using the pound sterling, keeping Germanys
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 worlds 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 nations gold in the Peoples 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
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. Weare 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 Germanys gold back home? It certainly was so in Venezuelas
case, fearful of the U.S.s power over its gold and
reserves. We dont expect any further statement on the reasons from
Germany because thats 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 werent
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
But you may rightly say that surely that wasnt the end of the story? Of course
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 Europes 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
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