German Central Bank: The Federal Reserve is Not a Fly-by-Night Operation

The Deutsche Bundesbank has issued the following statement (my highlights):

Gold reserves stored securely

Questions posed by DPA to Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank

How much German gold is stored in the United States, how much in Frankfurt and how much in Great Britain?

The Deutsche Bundesbank keeps part of its gold holdings in its own vaults in Ger-many, while other stocks of gold are stored at the central banks located in major gold trading centres. Specifically, these are

Deutsche Bundesbank, Frankfurt am Main: 1,036 tonnes (= 31%)
Federal Reserve Bank of New York (Fed): 1,536 tonnes (= 45%)
Bank of England, London: 450 tonnes (= 13%)
Banque de France, Paris: 374 tonnes (= 11%) 

Isn’t storing gold abroad an expensive anachronism?

The New York Fed and the Banque de France also offer to store gold holdings for other central banks free of charge. The Bank of England charges warehousing fees amount-ing to roughly €500,000 per year. Storage in the Bundesbank’s own vaults, too, involves costs. Matters of cost, however, are not the sole consideration in determining the choice of storage facility. The usability of gold as a reserve asset and storage security are much more important. During repeated visits to New York, London and Paris, our internal auditors have satisfied themselves that the security precautions in place there meet the same high stan-dards as those in Frankfurt.

What makes the Bundesbank so certain that German gold holdings are being stored securely abroad – even though, according to the German Federal Court of Auditors, these reserves have never been “physically inventoried and checked for authenticity and weight” by the Bundesbank itself or by independ-ent auditors?

At the beginning of the last decade, we brought 930 tonnes of gold to Frankfurt from London and subjected it to a painstaking inspection. Part of the gold was melted down in order to create new bars which conform with the “Good Delivery Standard” which is customary nowadays in gold trading. Of the 930 tonnes of gold, not one gram was missing. We do not have the slightest doubt that our holdings in New York and Paris are also made up of the purest fine gold. We have at our disposal fully documented lists of the bars, and our partner central banks send us every year confirmation not only of the bars’ existence but also of their quality. We receive confirmation of our gold reserves, measured in troy ounces. The Bundesbank has been drawing up its accounts on this basis since it came into existence. All external auditors have confirmed our accounting practices outright since then.

Why doesn’t the Bundesbank bring the gold back to Germany?

The reasons for storing gold reserves with foreign partner central banks are historical since, at the time, gold at these trading centres was transferred to the Bundesbank. To be more specific: in October 1951 the Bank deutscher Länder, the Bundesbank’s predecessor, purchased its first gold for DM 2.5 million; that was 529 kilograms at the time. By 1956, the gold reserves had risen to DM 6.2 billion, or 1,328 tonnes; upon its foundation in 1957, the Bundesbank took over these reserves. No further gold was added until the 1970s. During that entire period, we had nothing but the best of experiences with our partners in New York, London and Paris. There was never any doubt about the security of Germany’s gold. In future, we wish to continue to keep gold at international gold trading centres so that, when push comes to shove, we can have it available as a reserve asset as soon as possible. Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity. Similar pound sterling liquidity could be obtained by pledging the gold that is held with the Bank of England.

In the statement it issued on Tuesday, the Bundesbank said that it would “take up suggestions by the FCA wherever possible.” What does that mean specifically? When, and at what intervals, will Bundesbank auditors physically view the gold being held abroad?

The Bundesbank has decided to strive for a more balanced distribution of gold reserve holdings at home and broad, thereby taking increased account of gold’s function of preserving trust and confidence. After all, reserve assets have psychological significance, so to speak. In the next three years, we will repatriate 50 tonnes of gold annually from New York to Germany. That will give us the opportunity to inspect these bars, melt them down and convert them into “Good Delivery Standard” bars. That will therefore be a sort of spot check. Moreover, we are currently in the middle of discussions about a further expansion of our rights to conduct audits in New York, London and Paris. But, please: for years, our gold has been stored by the highly esteemed central banks of the United States, Great Britain and France without provoking any complaints whatsoever – not by just any fly-by-night operators. Part of the debate in Germany has veered somewhat towards the absurd.

Of note: You do not do a "spot check" by pulling out 50 tonnes annually from the Fed, when you have stored 1,536 tonnes. That is absurd. If you want to do a check, you pull all the gold out, to see if it is all available for delivery. Bernie Madoff could have kept his Ponzi scheme operation going for decades longer, if investors only did "spot checks" by pulling out just 3.2% of the funds they had on hand.

It is also noteworthy that the Bundesbank states the gold held at the Fed can be used by the Bundesbank as collateral to obtain dollars, but does not clarify if such dollar borrowing operations have occurred.

Bottom line: The Bundesbank statement raises more questions than it answers. Nothing in this statement should give comfort to German citizens that the Bundesbank is doing anything to properly determine that the reported holdings of gold by the German government actually exist as stated and in unencumbered fashion.