By Amine Bouchentouf
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% 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%), 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% 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. And German central bankers are just like everyone else -- sensing that troubles in the eurozone might deteriorate, they prefer to have their gold at home as a hedge against any economic cataclysm.
Second, there is word that Germany is looking to acquire even more gold and that it would like to build those assets at home. The reasons for this are straightforward: The German gold will actually be held in Germany. And if it so desires, Germany can quickly act in the markets to trade those gold bullions, purchase currency or conduct other transactions that it sees fit. The bottom line is that it makes sense for German gold to be in Germany.
The fact that Germany is recalling its massive gold reserves back home is a positive sign for gold investors. The message is clear: Gold is now one of the most precious resources out there, so much so that the second-largest holder of gold in the world now wants its gold close to home. This should send a positive signal to investors currently holding gold, as well as to potential investors looking at gold for the first time.
In addition, Germany’s actions will most likely be followed by those of other major central banks. The move is certainly bullish since it indicates just how valuable central banks are viewing gold. There is a strong likelihood that central banks, especially those of Russia, South Korea and Mexico, will follow suit and may even increase their gold purchases (which have been ongoing).
The Commodity Investor believes that Germany’s recent move in the gold markets is positive and recommends investors keep purchasing gold through ETFs such as SPDR Gold Trust (GLD). With all the demand for gold globally, central bank purchases and activities in the gold market may help propel prices past the $2500 mark this year.
Disclosure: The author is long gold.