The recent furor over Germany’s request to audit its gold reserves
being held by central banks in New York, London and Paris has
highlighted the fact that there is even more reason to have one bar in
hand versus two bars in the bush in today’s uncertain world.The controversy arose after the Bundesbank’s official requests for a full audit of German gold reserves were apparently turned down by the foreign central banks responsible for storing the bulk of German gold.
These central banks include the Federal Reserve Bank (1,536 tonnes), the Bank of England (450 tonnes) and the Banque de France (374 tonnes). The Bundesbank keeps just 1,036 tonnes of the county’s gold reserves in Frankfurt.
The Physical Premium
Of course, the whole point of buying precious metals as an investment in physical form is that they are a relatively easy way to store wealth for the common man. Nevertheless, the modern strategy would be to use the leverage available with precious metal ETFs, futures or options.
The status quo also tends to scoff at paying any premium for physical precious metals, since you could just buy more paper ounces using the premium you would have paid for physical.
They also argue that you may also have to pay to store the physical safely.
The physical premium is typically computed as a function of inventory management, including storage costs and time of delivery factors. Also included are the costs associated with keeping the doors to a low margin business open for all the fledging dealers, which is especially true for precious metal in bullion or non-numismatic form.
Unfortunately, for the elite or wealthy investor, the idea of taking physical possession is still a very radical concept. Only a relatively small percentage of the very small amount of precious metals allocated to the average portfolio is actually stored personally.
Sovereigns Scramble to Audit Their Gold Reserves
Apparently sovereigns like Germany found the idea of holding physical metal in their own vaults just as unromantic. Nevertheless, Germany has recently discovered that getting back all of its 2,360 tonnes of physical gold stored with other central banks may not be as easy as just asking for it.
The reason for sovereigns participating in an overseas gold storage program are numerous, and for many countries are mostly political, but the overseas storage issue is providing a textbook case of the importance of direct control of some, if not all, of one’s wealth.
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