Monday, January 28, 2013

So where is Germany's gold?

I'd been aware of pressure in Germany to at least check on, if not repatriate, the portion of that country's gold reserves that was held in foreign depositories for safe-keeping.  I understand this was principally a relic of the Cold War, whereby, if Germany were overrun by invading Warsaw Pact forces, her surviving government-in-exile would have at least some assets with which to fund its operations and pay its debts.  Be that as it may, I read an article about it in Der Spiegel last October, and found it interesting.  It seems that much of Germany's gold is held by the Federal Reserve in the USA.

Now, an article at International Man brings a whole new perspective to the issue.  Here's an excerpt.

Of course, the German government had received periodic assurances from the Fed that the gold is there; however, the issue began to get a bit sticky recently, when the Fed refused a request for inspection.

The world then raised a collective eyebrow, and, whilst not panicking over this development just yet, closer attention has come to bear, not only on the Fed, but on any institution that is entrusted with the storage of gold for other parties.

Concern spread to Austria, where a question arose in Parliament as to where Austria’s gold is stored. The answer provided was that 80% of it (224.4 tonnes) is in the UK. (It was claimed that the reason for this is that, if a crisis of some kind were to occur, it could be more easily traded from London than from Vienna.)

Seems reasonable enough, except that the return of the gold to Austria, if it were requested, may be a bit difficult, as the gold seems to have been leased out by the UK.

To many, a second eyebrow might go up at this point. Lease out the wealth of another nation? Isn’t this a bit... irresponsible?

Not to worry, it’s done all the time. In fact, the practice has been endorsed by none other than Alan Greenspan, former Chairman of the Fed. The gold is leased to a bullion bank, which typically pays one percent interest to the Fed, with a promise to return it on a specified date. The bullion bank then sells the gold on the open market and uses the proceeds to buy Treasury bonds, which will net a three to four percent return.

The nicest thing about such an arrangement is that the lessor continues to claim it on his balance sheet as a line item: “gold and gold receivables.” After all, an asset that we have leased out is still an asset, even if it has now been sold by the lessee.

In effect, this means that, if you bought a gold bar today, it is possible that it is a bar that was shipped from the Bundesbank to the Federal Reserve decades ago and is presently listed by the Fed on its balance sheet as “gold and gold receivables.”

Both you and the Fed are claiming to possess the same gold bar. The fly in the ointment, of course, is that only one bar can be the actual bar. The other is a receivable and therefore is an asset on paper only. This, of course, means that there is less gold in the world than has been claimed. How much less? That’s anyone’s guess.

There's more at the link.  Fascinating reading - and, if the author's speculations are correct (which I can't confirm, of course), deeply disturbing.  The fiscal house of cards about which we've spoken here so often before may have significantly less secure foundations than we thought . . .



Wraith said...

I predict a Market-Ticker Uberpost within 24 hours.

Will said...

And people wonder why even Congress can't get a look at (audit) our gold stocks at Fort Knox and the Fed.

SewerDweller said...

it's worse than that... there are a lot of tungsten filled bars showing up on the market. Bars with 'reputable' markings, from 'reputable' dealers.

we're in deeeeep doo doo.

Anonymous said...

How, how do accounting principles get set that allow a lessor to sell a leased asset? I would actually like to understand how decisions like that are made. If I'm reading about it on some blog I assume it is publicly known. Then (for the bonus ;) how could a run on gold -not- require a run on a bank generally; "...whether a possible run may become systemic" it's not like those assets are "walled off" from each other, right?