Germany calls in her foreign gold holdings

Buba wants her money back. (Her real money, that is.)

Earlier this week, Germany’s central bank, the Bundesbank, announced it would commence repatriating its vast offshore gold reserves, the second-largest stockpile in the world after that of the United States. Gold rose a bit after the news, but not much. It’s up about $20 for the week, still comfortably within medium-term trading range.

Really, gold? We expected more... This is big news, after all.

The folks over at ZeroHedge have been all over this story. Here’s Mr. Tyler Durden, putting things in perspective:

“[T]his is a momentous development, one which may signify that the regime of mutual assured and very much telegraphed — because if the central banks don’t have faith in one another, why should anyone else? — trust in central banks by other central banks is ending.”

Officially, Germany claims 3,396 tons of the shiny yellow metal...though only a third of it currently rests within its own borders. Almost half (45%) of the stash is vaulted some 80 feet beneath the streets of Lower Manhattan; roughly one tenth (11%) lies under the Banque de France. But now Buba wants it back. The Bundesbank will make a 300 ton withdrawal from its deposit in New York and a 374 ton, complete withdrawal from its holdings in France.

Just to reiterate that last point...Germany will withdraw ALL of its gold currently held in France. All. (of.) Its. Gold.

Now, what possible reason could the German government have for wanting to keep its hard asset currency close to home? Does it know something about the future of the euro that we don’t? Has Buba fallen out with the Feds and the Frogs?

Back in October of last year, the Bundesbank was enthusiastically making the case for keeping gold abroad, arguing that:

Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity.

So, there’s no reason to doubt the security of Germany’s gold deposits? Or to question the “key role that the US dollar plays as a reserve currency in the global financial system”? And certainly there’s no reason to make any large, sudden withdrawals, right? Again, from the Bundesbank’s October statement:

There was never any doubt about the security of Germany’s gold. In future, we wish to continue to keep gold at international gold trading centres so that, when push comes to shove, we can have it available as a reserve asset as soon as possible.

Indeed, as recently as last November, Andreas Dobret, a member of the Executive Board of the German Bundesbank, could be heard yapping about the “excellent relationship between the Bundesbank and the US Fed.”

In a speech given that month to the Federal Reserve Bank of New York’s Bill Dudley, Mr. Dobret responded to what he called “the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany,” by calling it “a discussion which is driven by irrational fears.”

What happened to those “irrational fears,” Mr. Dobret? Did they suddenly become uncomfortably rational?

German gold reserves peaked out at about 4,000 ounces back in 1968, three years before Richard Milhous Nixon unilaterally terminated convertibility of the Greenback to gold and five years before the Bretton Woods currency exchange markets closed (only to be opened as a “floating currency regime” shortly thereafter). A piece in The New York Times this week noted that, “The end of Bretton Woods in 1973 eliminated some, though not all, of gold’s importance as a universal currency.”

It’s certainly true that pointy-headed academics were talking individuals out of gold long before this moment in time...and that folksy billionaires have continued to do so since. But we have a feeling gold is about to get a whole lot more important. Again. Historically, gold has proved itself a reliable insurance against the corruptibility of men in positions of power...positions of power that routinely attract and promote corruptible men.

“The global monetary system rests on a fragile foundation of trust,” wrote Dan Amoss in these pages on Wednesday. And when that trust erodes? When the words “full faith and credit” are emptied out and nothing is found inside them? Well, it might then be time for something drastic, something to usher in a new age for the “once and future money.”


Joel Bowman, reckoning today from Buenos Aires, Argentina