News surfaced this week that the Bundesbank, Germany’s central bank, was recalling some 674 tonnes of gold that they hold outside of the country. This came as quite a surprise as this particular gold has been stored with the New York Federal Reserve and Bank de France for decades. But many were asking the question, why does it matter where Germany stores their gold?
Following World War II and the beginning of the Cold War, the majority of Germany’s gold was moved to the safekeeping of western central banks as a threat of Soviet invasion loomed; however, not until the end of the war did Germany start bringing their gold home. Germany is the world’s second largest holder of gold, and they held as little as three percent of their entire holdings domestically during the wars. Currently, that number is around 31%, and their plan is to hold about 50% of their gold in Frankfurt by 2020 by repatriating these 674 tonnes from New York and Paris.
Various commentators have tried to provide rationale for why Germany would have the incentive to do this with reasons ranging from the US Fed and central banks lack of proper auditing practices to the gold actually not being there. Giving conspiracy theories only so much credibility, I think Germany’s motivation is deeper and stems from the geopolitical risk of a breakup of the European Union.
Economic growth across the Eurozone is stagnant at best as they look to start off 2013 in a double dip recession. The Euro Zone sees almost a quarter (24.7%) of their labor force under the age of 25 unemployed and seeking work. And rates are higher in peripheral Eurozone countries like Greece, Spain, and Italy, who saw youth unemployment increase to 57.6%, 56.5%, and 37.1% respectively. The social unrest in these countries stems from the inability to find and/or keep work, and this ongoing problem that bares no present solution is what threatens the single currency zones present stability.
Through these times of economic uncertainty it is gold’s role in international finance that safeguards a number of these European nations from extreme currency instability. It’s interesting to note that while Germany looks to repatriate a large portion of their gold holdings, that these countries are still largely dependent on the precious metal. As the German’s are the second largest holder of physical gold, not far behind are Italy, France, and the rest of the EU to make up over 10,000 tonnes and almost a third of the World’s Central Banks’ Foreign Exchange Reserves. The very asset that backs their currency, unlike a lot of Asia, which post Bretton Woods opted to hold US dollars, is predominantly made up of gold. In essence, that is why Europe’s central banks are bound by an agreement referred to as CBGA3 which limits them flooding the market with large quantities of physical gold.
This preamble circles back to the importance of Germany bringing home their gold to store domestically, and I believe their reason for doing so is not unlike the typical retail investor who holds gold. Gold is the hedge or the insurance against debasement of currencies and geopolitical risk. I hope for the sake of the Nobel Price-winning Canadian Economist, Robert Mundell, that the Eurozone does not dissipate, but this move by Germany may be hedging against just that.