By Patrick A. Heller….
Commentary on Precious Metals Prepared for CoinWeek.com
On January 14, the German publication Handelsblatt reported that Germany has become serious about repatriating significant amounts of its gold reserves held outside of the country, primarily at the Federal Reserve Bank of New York. According to the Bundesbank, out of 109 million ounces of reported German gold reserves, 45% (about 49 million ounces) are stored at the Fed in New York, 13% at the Bank of England, 11% at the Bank of France, and 31% at the Bundesbank vault in Frankfurt.
Central banks around the world typically have part of their gold reserves stored at the Federal Reserve Bank of New York, in London, in Paris, or in Zurich to facilitate transactions of that metal. However, a substantial quantity of these official reserves has been leased to banks, mining companies, manufacturers and other central banks. Therefore, depositories do not actually have all of the metal that the International Monetary Fund formerly required them to report as being in the vaults.
Even the most conservative analysts concede that at least 15% of official gold reserves are out on lease, a minimum of about 150 million ounces. There are multiple analysts who think that as much as 50% of official gold reserves, about 500 million ounces, have been withdrawn from vaults for leasing activities.
It is the fear of many central banks that they may not be able to reclaim the physical gold reserves that are supposedly stored in the Federal Bank of New York that has led some of them to repatriate their reserves back within their borders in the past two years. If, and I probably should say when, Germany does so, that will shake international confidence in the US dollar to a degree not seen in more than 40 years.
In the late 1960s, French leader Charles DeGaulle was concerned that the US government did not have enough gold reserves to cover its outstanding currency. The French central bank started aggressively sending US paper dollars back to the US to exchange them for the physical gold that the US government promised as backing for the currency.
Because of these actions by the French central bank, US gold reserves were significantly depleted. The US government was boxed into a corner, because it did not have sufficient gold to back its currency. Eventually, in August 1971, US President Richard M. Nixon permanently closed the gold exchange window.
This action by the US government completely cut the tie between the US dollar and gold. Looking back, it can be called the beginning of the end of the US dollar’s status as the world’s reserve currency.
In theory, Germany’s central bank has more gold reserves than any central bank other than the Federal Reserve. In normal times, central banks are supposed to trust each other and the currencies of other nations. To the extent that the German central bank recalls the gold supposedly stored at the Federal Reserve Bank of New York, that will be a clear sign that the German government does not believe that the US government possesses sufficient physical gold to meet its obligations. This development could be the most significant move in the destruction of the value of the US dollar since Charles De Gaulle forced the US to give up gold over 40 years ago.
Part of the suspicion about how much of the 261 million ounces of reported gold reserves of the US government really owns or has in custody goes back to the change in the government’s monthly financial reports in the year 2000. In August 2000, the government reported that all 261 million ounces were “Gold Bullion Reserves.” In the September 2000, 1700 tons (54.65 million ounces) of gold at West Point were reclassified as “Custodial Gold,” which indicates that the US government may no longer own that metal. Despite questions over the years, no explanation has ever come from the US Mint to explain either the reason for the change or the legal status of the “Custodial Gold.”
Because the Bundesbank works closely with the Federal Reserve and other central banks and official financial organizations, it is likely that they informed the Federal Reserve at least a month or two ago that this announcement was forthcoming. In my recent columns I have speculated that the continued suppression of gold and silver prices could indicate that there was some horrible financial news that the US government was hiding. I cannot state as fact that the Bundesbank announcement is this secret the US government didn’t want to get out. But it is highly coincidental and sure looks suspicious.
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
The Bundesbank today confirmed that by the year 2020 it will recall 100% of its gold located in France and almost 20% of the gold now held at the Federal Reserve Bank of New York. It looks obvious to me that Germany is not trying to squeeze the Federal Reserve too hard by giving it a chance to purchase some newly mined gold over the years to deliver to Gernmany, so that the issue of insufficient physical gold could be punted into the future.
Maybe the Bundesbank is recalling 100% of its gold in France because it France has the gold. The recall from the Federal Reserve NY is only 20% because it cannot deliver more.