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2013-01-16 Germany Recalls Gold from NY Fed & Paris

Germany Repatriating Gold From NY, Paris 'In Case Of A Currency Crisis'

Germany’s central bank  announced Wednesday it will repatriate gold reserves held at the New York Fed and the Banque de France in order to have “the ability to exchange gold for foreign currency […] within a short space of time.”  Officials at the Bundesbank indicated they have no intention of selling gold, but acknowledged the move is “preemptive” in case a “currency crisis” hits the European Monetary Union.  While they tried to minimize the importance of the move at the Bundesbank, repatriating gold is a clear indication of public loss of confidence on foreign central banks and the integrity of the monetary union.  Over the past few years, Venezuela, Libya, and Iran have also repatriated their gold holdings.

“No, we have no intention to sell gold,” a Bundesbank spokesman said on the phone Wednesday, “[the relocation] is in case of a currency crisis.”  The argument is mildly paradoxical: the officially stated reasons for the repatriation of part of its gold holdings is to build trust and confidence domestically, and to have the ability to sell gold quickly If needed.

Specifically, the Bundesbank will be bringing to Frankfurt all of its 374 metric tons stored at the Banque de France (11% of its total reserves), and 300 metric tons held in the vault of the New York Fed, reducing its share in the U.S. from 45% to 37%.  At market prices, that’s about €27-billion ($36 billion) worth of physical gold bars.  According to the Financial Times, it will be the biggest planned gold transport on record.

The German central bank is looking to relocate 50% of its total reserves to Frankfurt by 2020; the EU’s largest economy is the world’s second largest holder of gold reserves, trailing only the U.S.  Why 50%, one may ask?  “It’s just a benchmark that makes sense,” a spokesman explained.

In a statement, the Bundesbank justified its relocation of gold reserves held in France as a natural consequence of the adoption of the euro, noting that as they hold the same currency, there is no need to keep the bars there if the situation arose where they would need foreign currency quick.  Reserves in London are to remain steady at 13% or 445 metric tons.  It’s repatriation of U.S. reserves are just part of their plan to keep 50% at home; the Bundesbank will keep more than 1,200 tons in New York.

Germany hasn’t bought or sold gold since 1973, and tried to keep its reserves “as far west as possible” during the Cold War, according to Bundesbank board member Carl-Ludwig Thiele, who prepared an important presentation (in German) on the matter.  Frankfurt brought back 940 tons from the Bank of England in 2000/1 in order to avoid storage costs, according to the FT, and has sold about 5 to 6 metric tons a year to the finance ministry to mint coins.  Interestingly, neither the New York Fed nor the Banque de France charge Germany to store its gold.

The move appears a response to public outrage over the Bundesbank’s oversight of its gold holdings.  Last October, federal auditors questioned the Bundesbank surveillance of its gold bars, asking whether officials had actually verified the existence of their holdings.  The Bundesbank insisted this was an independent decision and that there was “no loss of confidence” in fellow central banks, the spokesman told Forbes.  Yet the timing, and the fact that only Venezuela, Iran, and Libya have recently repatriated gold, and in their case over fears of asset seizures, casts doubt over the Bundesbank’s move.

While Thiele didn’t speak of how it would be transported for security reasons, the gold coming from the U.S. will probably have to be flown in.  This will probably have to be done in 3 to 5 ton shipments, the maximum insurance companies will cover, meaning it will take between 60 and 100 flights.  In 2011, Venezuela’s Hugo Chavez brought 160 tons of gold from New York to Caracas at an estimated cost of $9 million.  Gold from France could easily be moved by truck.

It was unclear whether the move would have a direct impact on gold prices, which were down 0.2% to $1,679.90 an ounce by 12:47 PM in New York.  Major gold miners were all in the red on Wednesday, with Goldcorp, Barrick Gold, Freeport McMoran and Newmont Mining all down between 0.7% and 1.5%, while silver slid 0.4% to $31.40.

Germany’s gold repatriation raises questions as to their belief in both the strength of the global economy and the European Monetary Union, and their trust of fellow central banks.  It also suggests the Bundesbank, with a reputation for independence, has felt the pressure of the public, and those federal audits.