Germany Wants Its Gold Back—Should You Worry?

The world's second-biggest holder of gold reserves, Germany, is planning to bring home some of its gold held in New York and Paris. This move would mark the breakdown of trust between the world's major central banks, according to analysts.

CNBC
Published: Tuesday, 15 Jan 2013
CNBC

The world's second-biggest holder of gold reserves, Germany, is planning to bring home some of its gold held in New York and Paris - a move that would mark a breakdown of trust between the world's major central banks, analysts said.

The Bundesbank, Germany's central bank, announced in a press release on Wednesday it plans to repatriate some of its gold holdings from the New York Federal Reserve and the Bank of France.

The release said the Bundesbank intends to move 300 tons of gold from New York to Frankfurt by 2020, plus a further 374 tons from Paris. By 2020, it expects to hold 50 percent of its reserves in its vaults in Frankfurt, with the remainder split between New York and London. None will remain in Paris.

"With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time," the Bundesbank said.

The Bundesbank said the complete withdrawal of its holdings from France is because the adoption of the euro means it is no longer reliant on Paris as a financial center in which to exchange gold for an international reserve currency.

Germany has almost 3,400 tons of gold, the world's second-largest holdings after the United States, valued at almost $177 billion at the end of December, according to the Bundesbank. It moved the bulk of its reserves abroad during the Cold War in case of an attack on West Germany by the Soviet Union.

News that Berlin wants to bring some of that gold back home is causing a stir, with Bill Gross, the managing director at bond giant PIMCO tweeting: "Report claims Germany moving gold from NY/Paris back to Frankfurt. Central banks don't trust each other?"

Ric Spooner, chief market analyst at CMC Markets in Sydney told CNBC Asia's "Squawk Box", "Whether or not their action really does reflect a lack of trust in the Fed (U.S. Federal Reserve) is a moot point, but it is certainly likely to be taken that way by some sectors of the market. The general inference is that if there was a real debt crisis in the U.S., then they (German authorities) would feel a little more confident about having their assets at home."

The U.S. fiscal woes are firmly in focus with Washington expected to reach its debt limit by the end of February. Finding long-term debt sustainability without hampering an economic recovery remains a challenge for policymakers, Fed chief Ben Bernanke said earlier this week.

"The reason the Bundesbank is doing this, repatriating the gold back home, is to instill confidence in the German consumer as to the solidity of the Bundesbank," Societe Generale's senior currency strategist Sebastien Galy told CNBC.

"Right now it is just a sign that the system is breaking down, that confidence is lower across the board and the entire financial system has basically become a domestic financial system, where you have the euro zone, a dollar zone and the yen zone," he added.

Dominic Schnider, global head of commodity research at UBS Wealth Management told CNBC, "Holding gold in key financial centers (New Tork, London or Paris) makes sense and can give access to foreign currencies like the U.S. dollar. On the other hand, we have seen how easy money printing is. Thus, we don't need gold anymore as collateral."

He added: "Nevertheless, holding some gold at home is not a bad idea in an age of ballooning central bank balance sheets. As a reference, Hong Kong also shipped its gold back home from London some years ago."

Analysts, however, did not expect any immediate reaction in gold or currency markets to any gold repatriation from the Bundesbank.

"For the gold market, it doesn't make any difference to the overall supply and demand situation. The Bundesbank is the owner of the gold regardless of where it's located," Spooner said.

For some analysts the question was not so much whether Germany would move its gold reserves, but whether it would sell the gold once it was back home.

"What Germany intends to do with its gold once it's repatriated would be interesting," said Nick Trevethan, senior commodities strategist at ANZ Research in Singapore. "We know that Venezuela sold some of its gold," he added, referring to a decision by Venezuela's government in 2011 to repatriate foreign bullion reserves from bank vaults in the West.

Mere Audit Check?

But despite all the theories about mutual central bank distrust and lack of faith in fiat currencies, or currencies that are not back by gold reserves, the Bundesbank's move - if push does come to a shove - may have a much more prosaic explanation: stock-taking.

In October, Germany withdrew two-thirds of its gold holdings from the Bank of England, according to media reports and in the same month a German federal court said the Bundesbank could conduct annual audits and physically inspect its gold reserves worldwide.

"Maybe it is triggered by a need to physically audit," David Kotok, chief investment officer at Cumberland Advisors said. "It is unusual so it triggers speculation about the motive. It may also be benign and markets just accept it."

There's some substance in this. Germany's international broadcaster Deutsche Welle reported on its website on Tuesday that the Bundesbank is reacting to a recent report by the Federal Audit Office which has criticized the lender for failing to thoroughly check the amount and authenticity of the bullion stored abroad,.

While such checks would still be needed in the future, the Bundesbank would have more of its reserves under its direct control by bringing home some of its stockpiles. The central bank is to disclose more details of its plan on Wednesday.

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