The Commodity Investor: Germany Recalling Gold Reserves Good News For Investors, Bad News For Federal Reserve

January 22, 2013

Expect other central banks to bring gold reserves within their borders.


Germany’s central bank, the Bundesbank, last week announced that it will be repatriating some of its gold reserves currently held overseas back to the homeland. Germany holds more than 3,000 tons of gold bullion, which represents more than 75 percent of its foreign currency reserves.

Germany has been amassing large amounts of gold reserves since the end of World War II, when it accepted payments in the form of gold for its goods and services it sold overseas.

During the Cold War, Germany moved large amounts of its gold holdings to the United States, the United Kingdom and France in order to protect its reserves from the growing Soviet military threat. Now Germany is in the process of moving that gold back within its borders.

Today, The Commodity Investor will examine in depth Germany’s gold holdings and their impact on the gold markets.

A Big Move

Germany’s announcement that it will move almost half its overseas gold holdings back within its borders has sent ripples throughout the markets. Currently, almost half of Germany’s gold is stored inside the vaults of the Federal Reserve Bank of New York in downtown Manhattan. This is not an unusual occurrence. Vaults of the New York Fed are used to store gold bullion for dozens of countries.

The vault inside the New York Fed lies almost 25 meters below the surface and is reputed to be one of the most secure places on the planet. It better be, since it holds more than 7,000 tons of gold, with a value worth almost $500 billion. Nearly all the gold inside is owned by foreign governments (98 percent), and the New York Fed only acts as custodian of the gold.

The fact that Germany is recalling some of its gold back is a serious blow to the Federal Reserve. Whatever the motives German central bankers may have, the fact of the matter is that this sends a sign of no confidence in the Fed’s services. This is also not confidence-inducing for the French Central Bank, where Germany stores about 10 percent of its gold.

Why such a move and why now? While the central bankers might not be straightforward with their motives, there are several explanations for such a move. First, as we have discussed in this column time and again, gold is the ultimate tool of confidence—in times of panic, people like to hold on to their gold, literally.



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