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CHRONIC INVESTOR BLOG

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Deutschland über assays

By Mark Robinson , 30 January 2013

It seems peculiarly atavistic that four decades after the US unilaterally terminated the dollar's convertibility to gold, we remain in thrall to the yellow metal. This was brought home last week, when it emerged that the Deutsche Bundesbank had asked both Banque de France and the US Federal Reserve to return a fair slice of Germany's gold reserves currently held abroad. What are we to make of this? Well, depending on who's bending your ear on the subject, you'll either be told that Berlin's decision sounds the death-knell for the fiat currency system, or is simply a predictable political wheeze by the Merkel government in response to a populist campaign by the mass-circulation Bild-Zeitung - a German tabloid normally associated with headlines like: "Helmut Kohl aß mein Zwerghamster!"

By the end of the decade, the Bundesbank intends to take custody of at least 20 per cent of the 1,500 tonnes of German gold reserves stored in the US, in addition to the 374 tonnes currently held by Banque de France. That means by 2020, vaults in Frankfurt will house over half of the 3,396 tonnes in gold reserves that Germany built up predominantly during the 'miracle years' following the last period of hostilities. It's worth noting that much of the gold nominally held by foreign custodians has never actually been inside Germany. This fact, along with some uncharacteristically lax inventory practises by the Bundesbank, has prompted suspicions about the bullion's very existence - hence the Bild-Zeitung spiel. A report by German Federal auditors strongly criticised the Bundesbank for failing to physically inspect their foreign-held gold reserves to verify their book value. However, an assay conducted subsequent to an earlier repatriation of 940 tonnes of gold from the Bank of England failed to identify any problems.

Of course, the Bundesbank wouldn't have to contend with these issues if it hadn't disregarded the lead provided by Herr Braun - our very own 'Iron Chancellor' - who sold off half the UK's gold reserves at the bottom of the market. Germany therefore retains the world's second-largest gold bullion reserves, with (theoretical) access to gold worth in excess of €199bn (£170bn) at current prices. Individual Germans also hold an estimated 7,500 tonnes, which is quite telling when you consider that aggregate private ownership in India - a country with 15 times as many people - is estimated at around 20,000 tonnes. The private savings of Germans were effectively wiped out twice during the course of the 20th century, so it is little wonder that they might be somewhat preoccupied with the issue of 'sound money'. Residual anxieties still weigh heavily on Merkel's post-war generation judging by the fact that, on average, every man, woman and child in Germany is privately holding €5,350 in physical gold bullion.

The Germans were impelled to hold their reserves abroad in the post-war period by geopolitical tensions, but as they're no longer expecting a visit from the Warsaw Pact, there's no real reason to persist with the policy. Added to that, the tub-thumpers at Bild-Zeitung - together with the deterministically named Deutsche lobby group Bring Our Gold Back Home - have been pushing the line that New York, Paris and even that erstwhile bastion of financial rectitude - London - have been engaged in unregulated gold swap arrangements with foreign banks that could effectively result in more than one party laying claim to the same bullion. (It's not dissimilar to the scheme perpetuated by the impresario Max Bialystock in Mel Brooks' The Producers).

The Bild-Zeitung campaign ties in with the long-standing claims by the US-based Gold Anti-Trust Action Committee (GATA) that the price of gold has been manipulated by a cartel of central banks since the mid-1990s. The GATA claims have been dismissed by central bankers as far-fetched, while some of the group's most vociferous supporters are from the gold lobby. Nonetheless, GATA - through a US federal freedom-of-information lawsuit - did manage to gain an admission from the US Federal Reserve that it was, indeed, engaged in gold swap arrangements with foreign banks, although I can't understand why central banks should necessarily be compelled to disclose any such arrangement. Still - following the Libor scandal - public confidence in financial institutions is hardly at an all-time high, so the controversy will undoubtedly rumble on.

Grist to the mill has been provided by a group of Swiss parliamentarians, who have raised questions over the veracity of foreign reserve bank inventories. That probably seems a bit rich considering the unresolved issues relating to the Swiss National Bank's cozy commercial relationship with the Deutsche Reichsbank during the 1930s. Austria's Freedom Party has also been beating the drum on this issue, although that's hardly surprising given the right wing's ideological obsession with Fractional Reserve Banking - an otherwise interminable subject best left to economists. Suffice to say, if the good burghers at Bild-Zeitung are successful in their repatriation campaign, then the German state would have enough gold bullion at its disposal to cover a whopping 5.6 per cent of GDP. That should allow chancellor Merkel to put those eurozone worries behind her for good.

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