The German Gold Rush

NYFedVault

It was announced this week that the German Federal Bank (Deutsche Bundesbank) will repatriate 674 metric tons of its own gold by the year 2020. Germany transported its gold to internationally secure locations during the Cold War to keep it out of the reach of the Soviets. Germany’s current reserves are located as follows: Germany = 31%; NY Fed = 45%; Bank of England = 13%; Banque de France = 11%. Germany plans to bring 50% of its reserves home by the year 2020. These reserves, in 2020, will be located as follows: Germany = 50%; NY Fed = 37%; Bank of England = 13%; Banque de France = 0%. The complete repatriation from France might have more to do with their mutual Euro currency than it does with Germany’s distrust of the Banque. They are not as reliant on France as a diversified international reserve currency as they can be and are with the U.S. dollar or British Pound. Diversification is the key word here and is always when speaking about strong financial positions. Germany has the largest gold reserves as a nation, right behind the U.S.

Conspiracy theories have abounded this week. I’m not as concerned over the 8% drop in Germany’s U.S. gold storage by the year 2020 as others I’ve heard this week are. The greatest red flag in my mind is: Why is Germany keeping 100% of its foreign reserves in England untouched and reducing their U.S. holdings by 8%? The New York Fed and the Banque de France both store gold for other central banks for free. The New York Fed does charge a small fee for transport into and out of their vaults. The Bank of England charges storage fees that are roughly 500,000-550,000 Euros/year. Bundesbank has to pay to store the gold in their own vaults as well vs. NY or France. So, based on that, why keep 100% of current reserves in London and bring 19% home from the U.S. and France? Why keep the 13% in London? France, in addition to not offering any currency diversification, does not offer the same level of bullion liquidity as the U.S. and England do. London, similar to New York and Zurich, is a center for physical bullion trade. It’s a similar philosophy as oil being physically traded in areas like the middle east. There is an advantage to location when it comes to commodities. That still doesn’t fully answer why Germany is pulling 8% from the U.S. and 0% from England.

Fiscal pessimists will say that this is the beginning of the end for the U.S. dollar. Optimists will say this is a move any nation in Germany’s shoes would make.  I happen to believe it’s somewhere in-between. Outside of Bundesbank, no one knows exactly what the fees are for transfer. Perhaps England’s fees made it more palatable to pull all from France and some from the U.S. Perhaps it was a calculated long-term decision based on current national fiscal positions. Some German politicians are promoting the thought that Germany should bring all of its reserves back home. Taking that into consideration, overall this is likely a move to diversify Germany’s fiscal stance, while growing confidence in its own national economy.

While something can be said for the amount of trust the Bundesbank has in the U.S. Fed, something can also be said for the amount of gold Germany will keep in the U.S. We will still outweigh England 37% to 13% when the transfers are complete by 2020. This tells me that Germany believes the U.S. will maintain its strength at least through that span of time. There are several concerns with these moves but overall, I take it as a positive sign for the U.S. economy through at least the next 7-10 years. If Germany had a legitimate fear of the U.S. dollar collapsing, it would likely pull 100% of its reserves from the U.S.

FedNY


One response to “The German Gold Rush

  • Adam Hook

    Perhaps the most important advantage of repatriating Germany’s gold is the fact that once it is on their soil, they can set the leverage.

    The CFTC regulations limit what we can let Germany borrow against their own gold while the physical asset is in the United States.

    I feel this move puts more doubt on the stability of the Euro. The United States will be in a good place if Germany starts borrowing heavily.

    Note that since this article was published, the Euro and Dollar currencies have both appreciated ~2% each.

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