Where the *Bleep* Is Germany’s Gold?

Germany's goldYou may have heard something about this story, but I think it’s important to take a few minutes to restate the facts clearly. In the modern news environment, stories come and go so fast – and in so many parts – that it’s very easy to get lost along the way.

So, here’s what we know so far:

  • In 2012, the Bundesbank (the central bank of Germany) asked to visit the vault of the Federal Reserve in New York, to view the 1,536 tons of gold they have stored there.
  • The Federal Reserve told them no. They were not allowed to see their gold.
  • In response, Germany said that they wanted 300 tons of their gold back.
  • The Federal Reserve said that they’d need seven years to get the gold back to Germany. (Something that should take them seven weeks, tops.)
  • One year later, the Fed has returned only 5 tons of gold to Germany. At this rate, it will take 60 years for the Germans to get less than one fifth of their gold back.

Though I don’t know precisely what, it is very clear that something strange is going on here… something that the prestigious central bankers want to keep away from the light of day.

Shipping 300 tons of metal is hardly a new and difficult technical challenge. Companies involved in metal trading do this all the time. Sure, gold requires extra security, but security is also something that lots of people know how to provide.

Give me half a percent as a premium, and I’ll have it arranged by next week!

The German Responses

The initial German response was the one mentioned above: Give us back our gold. But that happened over a year ago, after they weren’t allowed to see their gold. There have been further responses, following the very lame delivery of five tons.

These responses have come in just the past month or so:

The president of Germany’s top financial regulations group said that manipulation of gold and silver “is worse than the Libor-rigging scandal.” (The Libor scandal was and is a big deal, and lots of lawsuits are underway over it.) That’s a big accusation.

Then, Deutsche Bank, the biggest German bank, dropped out of the London gold fixing pool; the group of bankers that set the official price of gold. This is also related to the investigations by European regulators into the suspected manipulation of precious metals prices by banks. Again, this is a very significant event.

Germany does not seem happy about what the Fed is doing to them. These responses may seem timid, compared to what you or I might do if someone refused to give us back our gold, but they very clearly show that the German banks are objecting. (What’s going on behind the scenes remains unknown to us.)

In addition to this, the Financial Times ran an article advising investors to demand physical delivery of their gold. Bloomberg published an article on gold price manipulation. Whether they were pushed to do this by the Germans remains an open question.

What’s Really Going On?

So, given what we know, the obvious question becomes, “What’s really going on?”

The first answer is that we simply do not know, but even that deserves a short comment:

We don’t know because central banks are above scrutiny. They operate in secret, insulated by governments.

In any honest business, we could learn something about what’s going on, but central banking is different. Its operators not only control the world’s money, but they do it secretly.

So, we can only guess as to what’s happening.

Most likely, however, is that all of Germany’s gold has been lent out and/or used as loan collateral multiple times and that the Fed is having a very hard time unwinding all those loans. If they just give the gold back, the collateral for hundreds (maybe thousands) of international loans goes away.

And when I say “lent out multiple times,” I am not speaking loosely. There is a financial trick called rehypothecation that allows bankers to use the same stack of gold as the collateral for simultaneous loans… over and over and over.

So, in order to pull Germany’s gold out of the lending game (and central banks do loan out gold), lots and lots of loans would have to be rehypothecated to other piles of gold, and that requires a lot of office work. Each bar of Germany’s gold could be involved in a dozen loans, each of which must be re-arranged.

This would account for the slowness of the Fed returning the gold back to where it belongs.

Of course, there are other possibilities. Maybe the Fed is just trying to punish Germany for some reason (they’ve messed with them in the past), or that the gold is simply no longer there – that the Fed or its friends sold it.

The Bottom Line

It would be wonderful to figure out what will happen next, but we’d have to base that on what’s really going on now, and we don’t know even that. As mentioned, central banks never have to tell.

The one thing we can be sure of is that the Federal Reserve and the Bundesbank are at odds. What will come from that is unknown, but this is a very significant problem between giants, and it is already producing consequences.

Maybe this problem will go away. But if it doesn’t, it could become very, very significant.

And how that will affect each of us – well, that’s a very good question.

Paul Rosenberg