Germany’s Bundesbank is to repatriate gold reserves held abroad to tighten control and combat currency crises in the future, pulling a chunk of its holdings from New York and all its bullion from Paris.
The move marks an extraodinary breakdown in trust between leading central banks and has set off ferment among gold enthusiasts, with some comparing it with France’s withdrawal of gold from the US under President Charles de Gaulle as the Bretton Woods currency system crumbled in the late 1960s.
Handelsblatt said the Bundesbank will announce on Wednesday that it intends to relocate the gold to vaults in Frankfurt, said by insiders to include parts of the old archive library. Germany has 3,396 tons of gold worth roughly £115bn, the world’s second-largest holding after the US. Most of the reserves were stored abroad for safety during the Cold War.
The bank holds an estimated 45pc of its gold at the US Federal Reserve in New York, and 11pc at the Banque de France, lower than originally thought.
A report by Germany’s budget watchdog in October revealed that the bank halved its holding in London a decade ago, a period when the Bank of England was selling part of Britain’s gold at the bottom of the market to buy euros.
The gold was purportedly withdrawn because London was charging €500,000 a year in storage costs. The Bundesbank said part of 930 tonnes brought back was melted down for checks, and "not one gram was missing". It currently holds just 13pc of its total holdings at the Bank of England.
The Bundesbank says there is little reason to keep gold in Paris now that Germany is reunified and at peace. The bank will retain some reserves in London and New York for trading and liquidity purposes.
"Gold stored in your home safe is not immediately available as collateral in case you need foreign currency," said Bundesbank board member Carl-Ludwig Thiele late last year.
"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."
The latest shift in strategy follows criticism by the German Court of Auditors, who said in a confidential report that the gold held abroad had "never been verified physically" and was not under proper control. A growing chorus of lawmakers in the Bundestag has demanded a return of all Germany’s gold in case the financial crisis escalates.
Veteran gold trader Jim Sinclair said the Bundesbank’s move is a pivotal event in the gold market and the latest warning for investors that they should keep metal bars under their physcial control, rather than relying on paper contracts.
"This sends a message about storing gold near you and taking delivery no matter who is holding it. When France did this years ago it sent panic amongst the US financial leadership. History will look back on this salvo as being the beginning of the end of the US dollar as the reserve currency of choice," he said.
Many analysts say the world is moving towards a de facto gold standard again as China, Russia and other reserve powers boost their holdings to diversify out of dollars and euros.
Unlike Britain, Spain, Switzerland, Holland and others, Germany did not sell any of its gold when bullion was out of fashion. Nor did Italy. The two countries are now sitting on very substantial reserves that are starting to take on political significance. * How to invest in gold