The real reason Germany wants its gold back from France

Germany wants its gold back.

The German central bank, the Bundesbank, is laying out plans to bring a big chunk of the gold it has stored overseas back to Berlin.

That’s a lot of gold. In absolute terms, only the US owns more gold than Germany.

Why does this matter? Well, for one thing, it suggests the Bundesbank doesn’t trust other central banks to look after the country’s gold.

But perhaps more importantly, it rather suggests that Germany has serious doubts about the ability of the euro to hold its value

Germany is repossessing its gold

As we’ve pointed out before, there have been long-standing concerns about the integrity of the gold market.

One theory held by pressure groups such as GATA (Gold Anti-Trust Action Committee) is that central banks have been trying to suppress the price of gold, largely to conceal just how bankrupt the ‘fiat’ monetary system is.

They have done this by secretly lending their stock to the market. This means that much of the stated physical stock of gold consists of paper claims to the gold, not the gold itself. In other words, there’s a lot of double-counting going on.

GATA argues that there have been so many covert sales that the major vaults would find it impossible to cope with a sudden outflow of gold. Viewed from this perspective, Germany’s action could be seen as an attempt to get ahead of any possible run on the vaults.

This story would certainly make a good thriller. It also fits with Germany’s recent behaviour, which has included testing the purity of some of its overseas holdings.

However, like all such conspiracy theories, it’s hard to either prove or disprove.

Moreover, there’s a simpler explanation. German voters are worried that the euro is about to experience a drop in value. And the Bundesbank seems to agree with that view. So it wants to be sure that the country’s hard assets are under its direct control.

In this context, it’s particularly interesting that the Bundesbank is taking back every single one of the 374 tonnes of gold it has stored at the French central bank.

It’s also taking about 300 tonnes back from the US, but it’ll still have around 1,200 tonnes stored there. And Germany will still have some gold left at the Bank of England. 

Sure, both the Federal Reserve and the Bank of England are “near gold trading centres” as the FT puts it. But we don’t think it’s too much of a wild speculation to suggest that in the event of a euro break-up, Germans would feel much more jumpy about France holding a chunk of their gold hostage, than the US or the UK.

The optimists are wrong on Europe

Now we don’t expect the euro to break up entirely – certainly not in the short-to-medium term. But it could get a lot weaker from here.

Despite all the optimistic statements from the likes of the European Central Bank (ECB) and others this year, the truth is that the economic outlook for the eurozone is poor. While the area is currently running a trade surplus (it exports more than it imports), surveys suggest that exporters expect things to get worse.

Even Germany is having a tough time. Ben May of Capital Economics points out that domestic demand is getting weaker, while trade is likely to reduce, rather than boost, growth in 2013. Overall, he thinks the German economy will contract by 0.5% this year.

That’s all bad enough. But a bigger worry is the politics of the eurozone. The coming Italian election next month is a real wildcard. Italy’s current leader Mario Monti may hold out hopes of leading a government of national unity, but this now looks increasingly unlikely.

Instead, the big choice is now between the populist Silvio Berlusconi and a coalition of left-wing parties. Both groups are anti-reform, and victory for either could see markets lose faith in Italy once again.

Meanwhile, Germany seems to be finally taking a tougher line on bailing out other countries. For the past year, the approach has been for Angela Merkel to talk tough, then finally allow just enough aid through to delay disaster until later.

However, for the first time, pressure from all parties has forced Merkel to refuse the latest casualty, Cyprus, an immediate bail-out. This is now likely to be delayed until March at the earliest.

With economic pressure increasing, and the potential for nasty political surprises, the ECB may end up having to step in once again. If it has to make good on its promise to do “whatever it takes”, then this would hit the value of the euro.

Profit from money-printing in the eurozone

There are several obvious ways to benefit from this. One way, of course, is to do what the Germans are doing, and get yourself some gold. My colleague Dominic Frisby looked at the current state of the gold market in yesterday’s Money Morning: Every gold investor should watch these numbers like a hawk.

And as we’ve mentioned several times in the past, if you’ve an appetite for risk, you might also want to buy into the cheapest eurozone markets. They’ll be the ones that benefit most if the ECB starts up the printing presses.

If neither of those appeal, another perhaps less obvious idea is to consider buying into Swedish banks. JP Morgan’s Stephen Macklow-Smith points out that tough regulations following the banking crisis in the early 1990s means that they are the best run in Europe, with very high capital buffers.

A weaker euro should also boost the Swedish krona. One option is Nordea (STO: NDA) which currently trades at just under ten times earnings. Saxo Markets offers access to the Stockholm Stock Exchange for retail investors.

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20 Responses

  1. 17/01/2013, Roy Badami wrote

    Given the bizarrely long timescales for this repatriation of gold (which is due to be completed by 2020) I sincerely doubt that Germany has some prediction of a drop in value of the Euro in 2021!

    It’s not entirely clear what Germany’s motives are here, beyond doing the bare minimum to try to placate the movement to repatriate the countries gold…

    roy

  2. 17/01/2013, Pusser wrote

    @ 1. Roy. That seems a very important bit of info that would have been useful in Mathews article.

  3. 17/01/2013, Porkydawky wrote

    Indeed. 7 years to transfer 300 tonnes?

    When one considers a tonne of gold is approx at 14-15inch cube, a couple of flights would have the gold back in no time. Why the delay???

    Would love to get a look at those bars when they arrive to see when they were minted. Bet they are fresh out of the refinery as other anecdotal stories indicate when phys storage is cancelled and delivery taken.

  4. 17/01/2013, Roger wrote

    I think it is fair for a rich country to store its own gold intead of paying management fees for others for a stupid matter of storage. I do not think there is more to it. Again, gold price has gone nowhere, so Gold bugs who bought in between 1700-1900 are desperate for a reason for gold to move up. To say 2000, so what ? 10-20% gain, fantastic?

  5. 17/01/2013, Changing man wrote

    Perhaps Angela Merkel is an avid reader of Money Week and is responding to your repeated calls to hold physical gold?
    Seriously I can’t see any significance in this move other than good housekeeping? I am surprised that they have waited so long to move it. This is surely no more significant that Her Majesty inspecting our stash at the BOE vaults a few weeks ago?

  6. 17/01/2013, cookie wrote

    Interesting bet some of this Gold has Gordons finger prints all over it after his discount sale to make this country weak after frittering away the proceeds. The Germans are in a strong position because they believe in fiscal discipline after their own experience of printing money in the 1920 which we never experienced but maybe soon will after King & co have finnished dont blame them of running scared

  7. 17/01/2013, mikkip wrote

    This is another amateurish article from these doom and gloom gold bugs… if only the world was as simple as these mugs portray!

  8. 17/01/2013, Romford Dave wrote

    at someone actually had a plan, cunning or otherwise, that they were working too, rather than the oft repeated machinations of the QE experiment forever destined to disappoint to the downside.

    Countries are positively falling over themselves to debase their currency, perhaps our German cousins have realised the folly of such folly and decided that a strong Dmark is the way to go – eventually?

    Afterall, why worry about your export market if no one can afford to import anyway, much better to consolidate at home while picking up tasty titbits with your turbocharged tender.

    A new masterplan from the umlaut lovers to thwart the speakeasy spin of money printers.

    I welcome it.

  9. 17/01/2013, CLEE JOHN wrote

    You recommend Swedish Banks and the Swedish Krona; how about Norwegian Banks and the Norwegian Krona?

  10. 17/01/2013, JB wrote

    I am sure there is something deeper here with what is going on with Rio Tinto

  11. 17/01/2013, John of Leeds wrote

    Only clowns think that the USA has the Gold it claims to have.
    Its decades since it was audited – their is now a petition to have an audit.
    As anyone could see by the Queens visit to Bank vaults it would be a very
    simple task, however ownership of it would be problematic, I imagine
    there would be several owners of each bar if truth were know.
    No one could overestimate their crooked behaviour in all aspects of finance.

  12. 17/01/2013, Peter Kellow wrote

    I would not attach too much significance to the 7 year transfer period. If I were going to repatriate 374 tonnes of gold I would not be too precise about the date.

  13. 18/01/2013, IJ wrote

    yawn yawn

  14. 18/01/2013, NeutronWarp9 wrote

    12-Peter Kellow. If you are not too precise about the date it is because you are not following a plan, and as we know, the Germans love a plan.
    It’s when they come for your gold fillings that we should start to worry. Provocative I know but, alas, historically correct.

  15. 19/01/2013, SteveH wrote

    The accounting figures say that Germany owns the gold, full stop, and it makes no difference where it is stored. So no reason there to delay the move.
    My dodgy sums say $1B gold is around 1cuM, so basically the whold lot would fit into one large (and strong) shipping container. So no problem fitting it all into existing secure stores. Again no reason there to delay the move.
    So heaven help us, the logical conclusion is it doesn’t really exist or its been double counted whatever, and the delay is to allow sufficient time to finagle the figures without getting spotted.
    Is anyone here economist enough to work out the consequences if they get caught and the world finds out that half (whatever) the gold resources are missing?

  16. 19/01/2013, barmybird wrote

    Are they going past any Somali pirates on the way?

  17. 20/01/2013, Reality Check wrote

    What no one is saying here is that the reason it will take 7 years for Germany to get their gold back is because the Fed has leased most of it out.

    They have most probably struck a deal with Germany to return it provided they allow them a 7 year timescale. If Germany had refused then they would get nothing!

  18. 21/01/2013, Nick wrote

    GATA theories don’t make sense. As by far the largest holders of physical gold central bank’s interest, if any, is in prices being higher not lower. No currency is backed by gold any more so the price is irrelevant to them (except in the minds of gold bugs).

  19. 21/01/2013, Nick Fury wrote

    Well, well, well why the fuss for something that has no ‘real’ value. So many financial experts keep saying that physical gold is worth nothing! obviously it is or it wouldn’t take 7 years to extract it from a country, without causing the holders financial infastructure to collapse. At last, I think I realise why physical gold is not considered valuable, compared to when you can sell it 2 or 3 or 4+ times over, giving a paper chitty as colateral for it. Isn’t this how banks started in the beginning; lending out more money than they had on deposit – it’s all business as usual, my boy!!

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