Three days ago, as a result of recent discoveries relating to Germany's official sovereign gold inventory, we asked a rhetorical question: "Why Did The Bundesbank Secretly Withdraw Two-Thirds Of Its London Gold [15]?" There we presented the chonology of official disclosure regarding the whereabouts of German gold over the past decade, with an emphasis on its reclamation from London-based official vaults to the safety of the motherland, and left off with another open-ended statement that: "what is left unsaid in all of the above is that Germany has done nothing wrong! It simply demanded a reclamation of what is rightfully Germany's to demand." Nonetheless, the fact that Germany did this has opened a Pandora's box of unanswered questions, and even demands that Germany promptly demand delivery all of its gold - the second largest such hoard in the world only after the US - held abroad. Below is the official response by the Bundesbank.
Here is the gist::
We do not have the slightest doubt that our holdings in New York and Paris are also made up of the purest fine gold. We have at our disposal fully documented lists of the bars, and our partner central banks send us every year confirmation not only of the bars’ existence but also of their quality.
We had nothing but the best of experiences with our partners in New York, London and Paris. 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. Gold stored in your home safe is not immediately available as collateral in case you need foreign currency.
How about if you need collateral in your own currency, such as the de facto reserve currency of Europe, the DEM? Crickets?
The punchline:
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. Similar pound sterling liquidity could be obtained by pledging the gold that is held with the Bank of England.
And what otherwise would pass as Saturday Humor:
But, please: for years, our gold has been stored by the highly esteemed central banks of the United States, Great Britain and France without provoking any complaints whatsoever – not by just any fly-by-night operators. Part of the debate in Germany has veered somewhat towards the absurd.
In other words, German gold is being held hostage by the "highly esteemed central banks" of the US and the UK, due to the reserve currency status of the US Dollar, and apparently the British Pound. And the only way a central bank - read the Fed or the BOE - can extend a loan against gold-based collateral, is if said gold is already on location in the US or the UK.
Which of course, does not explain why Germany decided to withdraw two-thirds of its gold from London, as opposed to withdrawing none... or all, if indeed the logic above made sense.
But fear not: Buba has has nothing but the best experiences with its partners in New York, London and Paris, and as a result will gladly continue to allow them sole physical custody of Germany's gold.
Good luck, however, if Germany ever needs to repatriate said gold...
From the Bundesbank [16]:
Gold reserves stored securely
Questions posed by DPA to Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank
How much German gold is stored in the United States, how much in Frankfurt and how much in Great Britain?
The Deutsche Bundesbank keeps part of its gold holdings in its own vaults in Ger-many, while other stocks of gold are stored at the central banks located in major gold trading centres. Specifically, these are
- Deutsche Bundesbank, Frankfurt am Main: 1,036 tonnes (= 31%)
- Federal Reserve Bank of New York (Fed): 1,536 tonnes (= 45%)
- Bank of England, London: 450 tonnes (= 13%)
- Banque de France, Paris: 374 tonnes (= 11%)
Isn’t storing gold abroad an expensive anachronism?
The New York Fed and the Banque de France also offer to store gold holdings for other central banks free of charge. The Bank of England charges warehousing fees amount-ing to roughly €500,000 per year. Storage in the Bundesbank’s own vaults, too, involves costs. Matters of cost, however, are not the sole consideration in determining the choice of storage facility. The usability of gold as a reserve asset and storage security are much more important. During repeated visits to New York, London and Paris, our internal auditors have satisfied themselves that the security precautions in place there meet the same high standards as those in Frankfurt.
What makes the Bundesbank so certain that German gold holdings are being stored securely abroad – even though, according to the German Federal Court of Auditors, these reserves have never been “physically inventoried and checked for authenticity and weight” by the Bundesbank itself or by independ-ent auditors?
At the beginning of the last decade, we brought 930 tonnes of gold to Frankfurt from London and subjected it to a painstaking inspection. Part of the gold was melted down in order to create new bars which conform with the “Good Delivery Standard” which is customary nowadays in gold trading. Of the 930 tonnes of gold, not one gram was missing. We do not have the slightest doubt that our holdings in New York and Paris are also made up of the purest fine gold. We have at our disposal fully documented lists of the bars, and our partner central banks send us every year confirmation not only of the bars’ existence but also of their quality. We receive confirmation of our gold reserves, measured in troy ounces. The Bundesbank has been drawing up its accounts on this basis since it came into existence. All external auditors have confirmed our accounting practices outright since then.
Why doesn’t the Bundesbank bring the gold back to Germany?
The reasons for storing gold reserves with foreign partner central banks are historical since, at the time, gold at these trading centres was transferred to the Bundesbank. To be more specific: in October 1951 the Bank deutscher Länder, the Bundesbank’s predecessor, purchased its first gold for DM 2.5 million; that was 529 kilograms at the time. By 1956, the gold reserves had risen to DM 6.2 billion, or 1,328 tonnes; upon its foundation in 1957, the Bundesbank took over these reserves. No further gold was added until the 1970s. During that entire period, we had nothing but the best of experiences with our partners in New York, London and Paris. 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. 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. Similar pound sterling liquidity could be obtained by pledging the gold that is held with the Bank of England.
In the statement it issued on Tuesday, the Bundesbank said that it would “take up suggestions by the FCA wherever possible.” What does that mean specifically? When, and at what intervals, will Bundesbank auditors physically view the gold being held abroad?
The Bundesbank has decided to strive for a more balanced distribution of gold re-serve holdings at home and broad, thereby taking increased account of gold’s function of preserving trust and confidence. After all, reserve assets have psychological significance, so to speak. In the next three years, we will repatriate 50 tonnes of gold annually from New York to Germany. That will give us the opportunity to inspect these bars, melt them down and convert them into “Good Delivery Standard” bars. That will therefore be a sort of spot check. Moreover, we are currently in the middle of discussions about a further expansion of our rights to conduct audits in New York, London and Paris. But, please: for years, our gold has been stored by the highly esteemed central banks of the United States, Great Britain and France without provoking any complaints whatsoever – not by just any fly-by-night operators. Part of the debate in Germany has veered somewhat towards the absurd.