CareerSince 2010 Dombrett is member of the executive board of the Deutsche Bundesbank responsible for Financial Stability, Statistics and Risk Control. From 2005 to 2009, Dombret has been the Vice Chairman of Bank of America Global Investment Banking in Europe, the Middle East and Africa as well as Head of the German, Austrian and Swiss branches. Prior to joining Bank of America, Dombret was a Managing Director and the Co-Head of Rothschild Germany. Prior to this, he spent 10 years with JP Morgan in London and in Frankfurt, and was a Managing Director in the Investment Banking Division covering German clients. Andreas Dombret began his career at the headquarters of Deutsche Bank.
Central Banks Have Been Downplaying Gold As A Monetary Metal, But Have Been Buying The Yellow Metal, And Are Reluctant To Release Their Holdings – The Precious Metals Community Has Known For Years, The Bullion Banks (And Others) Have Sold More Paper Gold Than There Is Gold By As Much As 100 -1 And Can Not Cover The Enormous Amount Of Short Positions They Hold – When Will You Wake Up America?
Peter Warburton PHD 01-30-13 The Bundesbank, Germany’s central bank, recently declared its intention to repatriate all 412 tons of gold deposited in Paris and a further 330 tons of gold stored at the New York Federal Reserve over the next seven years. While the official rationale for Germany’s move is to verify the quality and standardize the size of the gold ingots, its action is open to varied interpretations, especially given that the Netherlands and Switzerland are also looking to bring their gold back home. The most intriguing is that the so-called bullion banks – primarily JP Morgan, Morgan Stanley, Deutsche Bank and UBS — have effectively sold the title to the gold, and that Germany is recalling it to force the banks to reconcile their short positions and effectively reclaim it.
In bringing its gold back home, Germany is paying tribute to gold’s status as a form of currency, as well as a precious metal. The Bundesbank is also sending a message to its fellow Europeans that, should the euro system disintegrate, Germany has a back-up plan for a national currency backed by gold. There is also an implicit recognition that, in the wake of the Lehman Brothers bankruptcy in 2008, gold is playing an increasingly important role as collateral in the global financial system. To suspicious minds, there is a more sinister explanation for gold repatriation: to forestall a situation where Germany’s gold reserves could not be returned due to extensive gold leasing activities.
Germany’s tortuous experiences with hyperinflation and currency collapse in the previous century have left a legacy of conservatism bordering on paranoia when it comes to the maintenance of sound money. In 1951, out of the ashes of World War II, Bank Deutsche Länder, predecessor to the Bundesbank, purchased its first gold. By 1956, the gold reserves had swelled to 1,463 tons, which the Bundesbank took over. More gold was added in the 1970s and 1980s as a consequence of Germany’s persistent trade surpluses. The current total is 3,737 tons.
The concentration of international gold trading in New York and London has made these the natural locations for the storage of central bank gold. The advantage lies in the availability of the gold to use as a reserve asset. Gold stored in Germany or France is not immediately available as collateral against the purchase of foreign currency. Gold held with the New York Federal Reserve can, if desired, be pledged with the U.S. Federal Reserve as collateral against U.S.-Dollar denominated liquidity. Similarly, gold deposited at the Bank of England can readily be turned into Sterling liquidity.
During the Cold War years, Germany had another motive for holding gold in disparate locations: The old West Germany was on the front line of the Cold War and vulnerable to assault from Russia’s tanks, which would have doubtless headed straight for the bullion vaults in Frankfurt.
Germany’s last reorganization of its gold reserves took place in 2001, but this was not disclosed to the public until quite recently. According to a confidential report referenced by London’s Daily Telegraph, the Bundesbank reduced its holdings at the Bank of England from 1,587 tons to 551 tons in 2001 allegedly because of high storage costs in London. It is perhaps significant that the Bank of England was in the middle of its own gold sales program at that time.
Peter Hambro, chairman of the UK-listed gold miner Petropavlovsk, said the Bundesbank may have withdrawn its bullion in self-protection since it did not, apparently, have its own specifically allocated bars in London. “They may have decided that the Bank of England had lent out too much gold, and decided it was safer to bring theirs home. This is about the identification. Can you identify your own allocated gold, or are you just a general creditor with a metal account?”
As of the end of 2012, only 31 percent of Germany’s gold reserves were held in Frankfurt; 45 percent were held in New York, 13 percent in London and 11 percent in Paris. The Bundesbank’s announcement requires the repatriation of all the gold held in France and a further 330 tons stored in the United States by 2020. In addition, as a result of the ruling of the German Court of Auditors, the Bundesbank is required to verify and audit all its official gold reserves.
The stated aims of the reorganization of its gold reserves are “to build trust and confidence domestically and the ability to exchange gold for foreign currencies at gold trading centres abroad at short notice.” Germany wishes to inspect the repatriated gold, in case of impurities, and to reconstitute it to London Good Delivery standards. It has been suggested that much of the gold held in New York is known as ‘Fed Melts’ or ‘Deep Storage’ bars and may not be acceptable for transactions without further refining.
Germany’s decision to bring back the gold, albeit over several years, sends a variety of messages to the watching world. According to Daniel Brebner and Xiao Fu of Deutsche Bank, the biggest impact of the Bundesbank’s actions is to lend further credibility to gold.
“We view the repatriation and upgrade of old gold by the Western world’s central banks as a further positive in gold’s evolution as a legitimate form of money,” they said in a statement.
A second context of interpretation is the crisis in sovereign debt and banking in the euro area. Germany could be regarded as sending a strong message to its European partners that its commitment to shoring up the euro system is not unlimited. Germany’s gold repatriation is a way of asserting its commitment to a sound domestic currency irrespective of the resolution of the euro crisis. In other words: Germany could use its gold to establish a new Deutschemark should the euro fail.
Another dimension to this decision is political. With German elections looming in September, the repatriation of gold will play well to the gallery of public opinion. The global financial crisis has spawned a distrust of banks, especially foreign banks. People have grown suspicious of assets that are merely recorded as entries on a bank’s balance sheet: There is a security in physical ownership.
There is an even more critical view of Germany’s decision, however, which takes into account the parallel petitions for gold repatriation by the Netherlands and Switzerland. It is a perspective that reads into the seven-year timescale an admission that the gold could not be readily returned to Germany immediately. After all, a few military planeloads would suffice to transport the gold. Why should this operation take more than a few weeks?
The conspiracy theory proponents contend that central banks are constrained from releasing the gold immediately by their nefarious activities in the ‘paper gold’ or gold derivatives markets. While the central banks hold the gold, they have relinquished title to it.
If they have surrendered title to gold through a paper transaction, legally they should not transfer the actual gold.
It is no secret that central banks, and even the Bank of International Settlements in Switzerland, have been engaged in the lending and leasing of their gold reserves for many years. The traditional justification for this practice is to satisfy a spike in demand for physical gold confirmation claims during liquidity crises. The complete absence of data on central bank gold derivatives leaves the field wide open to accusations that central banks have relinquished title to much of their gold, even though it remains in their vaults. All that can be said for certain is that U.S. commercial banks have become much more active in trading gold derivatives since 2006.
This information vacuum has given rise to a particular charge against the central banks: that they have lent or leased gold to the bullion banks (principally JP Morgan, Morgan Stanley, UBS and Deutsche Bank) in order to allow them to boost the demand for other financial assets. With gold leasing rates typically near zero, this would have allowed investment banks to borrow gold at virtually no cost and collect a higher yield on stocks or bonds.
However, as the price of gold has tracked steadily higher since its 1999 lows, the accusation is that the bullion banks have been denied the opportunity to trade out of their short gold positions. It is alleged that the central banks have been forced to keep lending out their gold in order to rescue the bullion banks from embarrassment. If this were so, then there would ultimately come a point at which a shortage of physical gold for immediate delivery would arise. The price of cash gold would soar in relation to that of gold for future delivery. This is known as a state of price backwardation.
No matter how innocent the Bundesbank’s intentions with regard to the location of Germany’s gold reserves, given the highly politicized nature of the gold market, it was inevitable that it would excite rampant speculation over its true motives. Indeed, the slow pace of transfer of the gold from New York to Frankfurt may reflect a desire to avoid the slightest perception of a loss of confidence in the custodial integrity of the U.S. Fed. Instead, it has aroused the opposite suspicions. If the price of gold, especially in euros, were to shoot upwards, then the speculation would surely intensify. Germany has chosen an unusual moment to repatriate its gold.
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