Why the Bundesbank is (slowly) repatriating (some of) its gold

I’ll take it as given that my readers are aware of the German gold repatriation, which was driven by the release in October 2012 of a report by the Federal Audit Office that contained criticism of the way the Bundesbank managed its overseas gold reserves. The goldbug spin on this is that it shows that Germany doesn’t trust the US or the Fed.

I agree with Jim Rickards, as paraphrased by GATA, “that Germany’s Bundesbank really doesn’t want any of its gold returned from the Federal Reserve Bank of New York and has arranged for the return of a small part of it only as a political sop to agitation in Germany’s parliament.” (see this story CDU Politician Wants to Bring German Gold Home for an example of that political agitation.)

It is worth noting that “the Audit Court can only give recommendations and can’t legally force the Bundesbank to act” so they could have ignored the calls for repatriation. However, as a result of the political fallout of the auditor report, the Bundesbank decided that “despite our different view of the law, the Bundesbank will, where possible, take up the audit court’s suggestions”.

In support of Jim’s idea that it is just to pacify local domestic politics, consider this speech in New York in November 2012 by Dr Andreas Dombret (Board Member of the Bundesbank). If you read the whole thing it certainly doesn’t sound like there is any distrust. Some key quotes:

• bizarre public discussion … on the safety of our gold deposits … driven by irrational fears
• conducting a “phantom debate” on the safety of our gold reserves. The arguments raised are not really convincing
• the excellent relationship between the Bundesbank and the US Fed
• looking back at sixty years not only of fruitful cooperation in many fields and international fora, but also of storing gold and trading via the New York Fed
• we have never encountered the slightest problem, let alone had any doubts concerning the credibility of the Fed
• Bill [Dudley, of the FED], I would like to thank you personally. I am also grateful for your uncomplicated cooperation in so many matters.
• Bundesbank will remain the Fed’s trusted partner in future
• we are confident that our gold is in safe hands with you

Some may say that this is just what is said in public, but that behind the scenes they really don’t trust the US Fed. Possibly, but I think that central bankers are all of the same mindset and values, part of the same club – Andreas wants to thank his mate Bill personally. I doubt that the German central bankers put on a show to their fellow central bankers but really believe in the gold standard. In his talk, Andreas says that gold is important but that “we have to combat a crisis of confidence in the euro area. This is the task we need to concentrate on”. Confidence in fiat is more important to these guys.

This then leads me on to the amount and timing of gold being repatriated. I cannot find any evidence that the rate of repatriation was at the Fed’s insistence – this seems to be an assumption by goldbugs. Considering they trust their mates at the Fed, and are being forced to do it politically, my view is that the rate was decided by the Bundesbank.

As Deutsche Bank analysts said, “we believe that the slow transfer of gold … is partly a reflection of its wish to avoid any perception of a change in confidence in the US Fed”. Confidence is what is important, and confidence in the US dollar is realted to confidence in the Euro as they are both fiats.

Also, consider that the logistics and security of moving gold are complicated and expensive. As Forbes notes:

“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.” (Note it took Venezuela 4 months to get that gold.)

Then you have the issue that most of the gold they accumulated was during the 1950s and 1960s (see Andreas’ talk) so the bar would not meet current wholesale market standards. Again, the Deutsche Bank analysts: “We believe much of the gold held in NY is old, known as ‘Fed Melts’ or ‘Deep Storage’ bars and may not be acceptable as is for transaction without additional processing” and that a “secondary factor could perhaps be the reluctance to put undue strain on the gold refining sector”. As a side point, if “they have no intention of selling gold” (link) then I think it is worth asking why does the gold needs to be recast to current standards?

So if you step into the shoes of a central banker, who enjoy their “independence” of politics, you can see that the audit report and the resulting political storm could be considered an annoyance and affront to their independence. They then see that there is significant cost and security risks to moving the gold so naturally there is resistance to having to concede to the demands for repatriation, the arguments for which are “not really convincing” to them.

As final proof of this reluctance (“where possible [we will] take up the audit court’s suggestions”), we now have reports that they only took 5 tonnes from the US and 32 tonnes from France. Does that rate of actual repatriation sound like someone worried about their fellow central banking mates?

Should they keep their reserves in Germany? IMO all countries should. Does it make sense that the Fed doesn’t allow viewings “in the interest of security and of the control process” when they allow tourists to see the vault? IMO no. Is it acceptable that the Bundesbank just trusts a custodian and accepts as an appropriate auditing process:

• “in 2007, “following numerous enquiries,” Bundesbank staff members were allowed to see the facility, but they reportedly only made it to the anteroom of the German reserves.”
• “auditors from the Bundesbank made a second visit in May 2011. This time one of the nine compartments was also opened, in which the German gold bars are densely stacked. A few were pulled out and weighed.”

IMO no. But it is clear to me that their public statements and (lack of) action reflect the fact that they consider the repatriation as “irrational” rather than showing any distrust in the US or France central banks.