Germany is bringing the gold home. The government of Germany has asked that a large portion of its gold reserves that have been kept abroad be returned.
Since 1973 Germany has not bought or sold any gold except what is released to their mint for commemorative coins.
Germany has the second largest gold reserves after the United States. Germany at present owns about 3,400 tons which has been kept in 4 locations. These locations are New York, London, Paris and of course their own financial capital Frankfurt.
The goal is to have 50 percent of their gold holdings repatriated by 2020 as opposed to a third at present. They are withdrawing about 300 tons from the New York Fed. This will reduce its total gold holdings that are kept in the United States from 45 to 37%.
All of the 374 tons stored at the Banque de France which contains 11% of the total reserve is being removed. Interestingly enough neither the bank in Paris or New York charged the Germans anything to house the gold.
Reserves kept in London are to remain constant at 445 tons which is about 13% of the total. The Bank of London does charge the Germans for storage at about 550,000 pounds a year. The Germans had already withdrawn 940 tons from Britain in 2000/2001. To save on storage fees was the reason given at the time by the Bundesbank (the German Central Bank).
The question one might ask is why Germany is bringing the gold home now?
To understand that you should also be asking why the gold was kept abroad to begin with?
After World War II Germany did not possess any gold reserves. As the new government began gold purchases in the post war era it was deemed prudent to store the growing gold reserves as far west as possible in case of a Soviet invasion.
The other reason was that since gold is one currency accepted everywhere in a financial crisis the gold could be used quickly to help restore confidence in the currency of Germany and elsewhere.
Neither of these scenarios are as plausible as they once were.
So the question remains. Why is Germany bringing the gold home now?
There are a number of reasons. The Americans it is theorized store the gold at no cost because the presence of foreign gold supports the status of the dollar being a global reserve currency. Are the Germans beginning to wonder if the United States will ever be able to get its fiscal and monetary house in order? Do the Germans feel the chances of a collapse in the dollar have gone from unlikely to quite possible given the huge run up in debt in the last few years? This would be in addition to the monetization of that debt by the American Federal Reserve. This simply means the printing of money to cover the financial shortfall by the government.
The second reason can very well be political in that the German American relationship is no longer as important to either the Germans or the Americans. Germany has found her place at the moment in the European system and is a dominant force in that arrangement.
The Americans under the Obama administration no longer make the special relationship with Europe and Germany a priority. It was the cornerstone of American policy since the end of the Second World War. It has been nothing dramatic, just a set of events that have shown the Germans that American policy for now is shifting.
The United States itself is less able to influence policy in an economic sense based on its poor management of its government expenditures and debt. The Germans are looking for new partners and areas of growth. Germany is a net exporter of manufactures and capital goods. It needs a place to sell these goods as well as being able to import raw materials to keep its factories humming. The United States is becoming less helpful in this endeavor because of its own economic problems.
The above explanations are plausible but there is an additional reason one must consider. This would be in addition to the domestic brouhaha in Germany last fall about the safety and accountability when dealing with their gold reserves.
The answer lies in the German caution when it comes to their finances. The Euro has stabilized for the moment but for how long? Could the Germans be planning for the eventual breakup of the Euro? Are the Germans contemplating going it alone with their own currency? If that is the case bringing more of their own gold home makes perfect sense.
The Germans do know that another recession is on its way in the near future. The countries already in serious trouble mainly Greece, Spain, Italy and Portugal have elected governments that have committed themselves to austerity as the price for continued help from Germany and European institutions. Will these politicians be able to continue downsizing their debt as the economic downturn continues? These countries cannot export their way back to financial health easily. The relatively strong Euro prevents that.
A more likely scenario is that these governments will have to back away from these earlier agreements and in one form or another later default. When this happens the game to save the Euro is over. Either these countries leave the Euro or their creditors will need to do so. This would include Germany.
The only other option is for the Germans to continue massive transfers of wealth to the periphery countries that are in such dire trouble. Can German politicians who value staying in the Euro convince the German taxpayer that this is a good investment for them? In the long run that is doubtful. Sooner or later, a majority of Germans may well decide, that going alone although risky is preferable to the continued payments.
The only way out then would be to create the United States of Europe but the domestic politics in too many European countries make that as unlikely as well.
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