Is the world’s biggest gold vault empty?

In 1978, the peasant farmers in a small Chinese village called Xiaogang gathered late and in strict secrecy to sign a contract. The contract was signed under lamplight, and then hidden away in the straw roof of their hut. If discovered, it was dangerous enough to get all of them killed.

The Xiaogang farmers' contract ended up changing China, and must be in with a shout as one of the most important documents in human history. What was it? It was a simple agreement which allowed the farmers to keep someof the produce they grew for themselves. Previously, all produce in Xiaogang was shared by the collective.

After a bumper harvest, their scheme was discovered. But they were lucky. At that time, influential people in the Communist Party leadership wanted to reform China's economy, and the Xiaogang farmers were held up as role models. Within a few years, farms all over China adopted the principles in that secret document. The government launched other economic reforms, and China's economy started to take off. Since the document was signed in 1978, around 500 million people have risenout of poverty in China.

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This wasn't the first time a seemingly innocuous event changed the course of history. Think of when JFK passed the Interest Equalisation Tax in 1963. His intention was to discourage Americans from investing abroad. He certainly didn't plan on reviving the City of London but that's what happened. The tax led to the creation of the eurobond market, which brought London back from the brink and helped it surpass New York as the world's leading financial centre.

Or consider when Jacques Delors wrote the Maastricht Treaty, which created the euro, in 1992. There were not many back then who foresaw how dangerous the euro would become, 20 years later.

My point is that when we look back at history, the most important turning points often go unnoticed at the time.

So, will 2014 come to be remembered as one of those times?

The Fed's hidden treasure

Of course security has to be pretty tight, for the vault that contains over 20% of the world's gold. But some owners have become increasingly suspicious over the existence of the gold.

When the German government recently asked to see around 1,536 tonnes of German gold stored in that vault, which amounts to roughly half of Berlin's reserves, Der Spiegelreports that the Federal Reserve refused to allow German inspectors to view them"in the interest of security and of the control process".

Frustrated by the lack of transparency, the Germans recently decided to take back control and move some of their gold back to Germany. So last year the US agreed that 674 tonnes would be repatriated over eight years. That's an annual run rate of about 84 tonnes a year.

The fact that it was going to take eight years didn't exactly calm frayed nerves, but the powers that be put on a brave face and assured the German population that all was well with their gold.

Now, it's a total mystery what's going on within the New York Federal Reserve's gold vaults. Hard numbers are very difficult to come by but we got a new one recently. We learned that of the 84 tonnes that Germany is due this year, it's received justfive tonnes.

The US is officially by far the largest holder of gold in the world, so 84 tonnes should not have been a problem. But it would appear that it was. Despite holding 8,133 tonnes of its own gold, as well as 1,536 tonnes of Germany's, it was only able to repatriate five tonnes back to Germany.

Will future historians look back on Germany's missing shipments of gold as one of those turning points?

This article originally appeared in the Metals & Miners newsletter on 14 April 2014. To learn more about Metals & Miners and Simon Popple, click here.

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