by Adam Richardson
What do you think? Is gold money? We say “Yes”, and now it appears that Germany agrees with us!
Anytime a bank or nation admits the value of gold it is a victory for advocates of holding hard assets in the form of precious metals. That gold is (good) money and that fiat paper currency is not is not news around here.
But Q Wealth Co-editor Peter Macfarlane has news of an interesting twist to the story behind Germany’s new found appreciation of gold.
Read on to hear what Peter has uncovered…
THE SURPRISING STORY BEHIND THE BUNDESBANK’S GOLD
More than ever, Germans miss the Deutschemark, the symbol of post-war Germany’s ‘Wirtschaftswunder” or economic wonder. They don’t place much trust in the euro, especially with the recent bailouts. German taxpayers feel they are having to pay for the excesses of politicians in countries like Greece and Spain.
They do, however, have one consolation: if the euro collapses, Germany still has huge reserves of the hardest currency of all: gold.
What most Germans did not know until recently, however, was that most of Germany’s gold reserves are not actually stored in Germany. In fact, according to the Bundesbank’s own figures, it stores only 30.6% of its gold reserves itself. The rest is divided between central bank storage facilities in the US, England and France.
Whilst Bundesbank officials swear they have visited their gold and are sure it exists, the German public is not so sure. Many people reasonably wonder why German gold reserves would be stored in other countries at all. Increased demands for transparency led the Bundesbank to announce last month a plan to repatriate 674 tonnes of gold.
Now, shipping 674 tonnes of gold is undoubtedly not without difficult – anybody who has carried more than a few gold coins across a border can attest to that. Carl-Ludwig Thiele, a Bundesbank representative quoted in the New York Times, declined on security grounds to say how the transfer would be accomplished. But, he assured the public, the Bundesbank has plenty of experience moving large sums of money.
Why, then, will it take seven years to move this gold? That’s right, and this is the part I did not read about in the mainstream press when they first reported on this story. They conveniently implied that the 674 tonnes would soon be on their way to Germany. In fact, if you read the small print, the plan is to move the gold between now and 2020.
A lot could happen between now and 2020. The German central bank, that operates with a strong degree of independence from the government, is proud of its gold holdings and its ability to deploy them quickly to intervene in the foreign exchange markets if necessary. Yet, they cannot get their hands on all this gold for the next seven years?
The Bank of England, much like Swiss banks are now doing with private and institutional clients that hold gold bullion in Switzerland, charges the Bundesbank over half a million euros a year for storing the German gold that is held in England.
Bizarrely, however, the New York Fed stores the German gold for free, reports the NYT, on the basis that the presence of the German gold is “supporting the dollar’s status as the global reserve currency.”
I’m not quite sure what that is supposed to mean, and I doubt anybody really knows. Why would European gold be used to support the dollar? This revelation will certainly add to the concerns of those who believe the gold doesn’t actually exist, or that it is somehow pledged or restricted in some way. Here, I believe, we have the key reason as to why the Bundesbank has to wait until 2020 for its gold, rather than simply withdrawing it from the vault and having it shipped across the Atlantic.
Concerns that gold shown on balance sheets does not really exist in real life are certainly justified. Gold reserves are exposed to accounting whims, both at national and commercial bank levels, such as whether to include gold on balance sheets as “international reserves” or as being held by some other entity such as a sovereign wealth fund. Saudi Arabia suddenly announced in 2010, for example, that its gold reserves had more than doubled on paper as the result of an accounting shift. If the Saudis can do it, then for sure the Americans can – or anybody else for that matter.
At a more down-to-earth level, Swiss banks have recently substantially raised vault fees on unallocated gold held by financial institutions in other countries, apparently in an attempt to clean up their balance sheets and encourage these institutional investors to hold allocated gold instead. The rationale is that allocated gold does not appear on the banks’ balance sheets, whereas unallocated does – forcing them to increase capital reserves ahead of the introduction of the new Basel III global banking capitalization rules, and therefore leading to additional capital costs for the Swiss banks. They would rather be deploying that capital in more profitable (or risky?) activities.
There are certainly a lot of tricky accounting goings-on we don’t know about in the international gold markets, and I’m even not sure we want to know about them. But it reinforces the message we have been preaching for years here at Q Wealth: hold your gold in physical form, outside the banking system.
Only by having physical precious metals, held in your name, that you can even visit, point at and touch and know “that is my gold”… only then do you really have the security and protection you are looking to achieve by holding metals in the first place.
More on this, and why NOT to invest in paper gold or ETFs, is available in our Gold Report “How to Own Gold the Right Way” – available for free download on this site.
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