Germany recently made big news by announcing its plan to bring home part of its massive gold reserves. By retrieving 300 tons from New York and all 374 tons from Paris, 19% of its holdings – $36 billion worth – will be repatriated. By 2020, Deutsche Bundesbank expects to have 50% of its gold reserves stored in its Frankfurt vaults.
While Germany’s announcement is no longer front-page news, it is important to consider the reasons behind this move, and the message being sent to investors by central banks around the globe – gold is money. So fasten your seatbelt, this around-the-world tour is about to begin.
Germany’s Gold Holdings
The reason given by the German central bank for its recently announced repatriation plan was to ‘build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold-trading centers abroad within a short space of time.’
Keeping reserves in London and New York – both international markets with great liquidity – affords Germany the ability to complete transactions quickly. Furthermore, Bundesbank has made it clear that this is not to be taken as a sign that it will be selling gold. Quite the opposite, as it also stated that this move is a ‘pre-emptive’ measure ‘in case of a currency crisis.’
Venezuela’s Gold Holdings
You’ll likely recall Hugo Chávez’s repatriation of Venezuelan gold in late 2011 – a decision that was widely believed to be motivated by fears of US sanctions and frozen assets. Chávez, however, said the move was to ‘safeguard against volatility in financial markets’.
Admittedly, Chávez’s decision did not hold the same weight as Germany’s in the eyes of the world. Germany is an ally of the US, after all. However, having repatriated his gold just months before Europe’s debt crisis took hold, it’s hard to dismiss the foresight demonstrated by the 15th-largest gold holder in the world.
Russia’s Gold Holdings
Russia, with the eighth-largest holding of gold in the world – almost 938 tonnes (over $50 billion) – has been increasing its gold holdings hand over fist in recent years. In 2012, its gold reserves increased a hair shy of 55 tonnes, more than 6%. The reason given, according to Reuters, is ‘to diversify its foreign reserves away from paper assets it views as risky.’
Switzerland’s Gold holdings
In 2011, an alarm was raised as many realized that more than half of the Swiss national gold had been sold off. This gave rise to the ‘Gold Initiative: A Swiss Initiative to Secure the Swiss National Bank’s Gold Reserves’.
Launched by four members of the Swiss parliament, the goal of the initiative is clearly identified in the name; to keep gold reserves secure through three requirements.
- The gold of the Swiss National Bank must be stored physically in Switzerland.
- The Swiss National Bank does not have the right to sell its gold reserves.
- The Swiss National Bank must hold at least twenty percent (20%) of its total assets in gold.
Two of the main reasons given for desiring to secure these reserves are: ‘the United States Federal Reserve and the European Union (with the European Central Bank ECB) are in the process of a de facto devaluation of their respective currencies, by printing tremendous amounts of Dollars and Euros’; and ‘These actions strongly affect the Swiss National Bank, as the Swiss franc runs the risk of being devaluated as well.’
As is stated clearly, ‘The greater the risk, the more important it is to maintain a sufficient gold stockpile!’
Dutch Gold Holdings
Of the Netherlands’ 612.5 tonnes of gold, only about 11% is in Dutch vaults. Over half is in New York, with the rest divided between London and Ottawa. While recently the Dutch Christian Democratic Appeal Party has made an official appeal to repatriate Netherlands’ gold reserves, interestingly, this is nothing new. In January, 2012, Willem Middelkoop warned that ‘The Netherlands should repatriate its gold as soon as possible.’
China’s Gold Holdings
While the World Gold Council reports China as owning just over 1,054 tonnes of gold, it’s a well-known fact that the Asian powerhouse is very secretive about its true holdings until it sees an advantage in reporting.
Even then, speculation abounds as to the verity of its claims. Some have estimated that, in light of the 1,054 tonnes being reported in 2009, by the end of 2013 China may hold as much as 4,000 tonnes of the yellow metal.
Even if this is true, it would still only represent approximately 8% of its total reserves. However, the gold market could react quite strongly if China announces reserves anywhere near these levels.
As the world’s largest gold producer for the past six years, China is perfectly capable of building reserves under the radar. Furthermore, due to its secrecy regarding its holdings, don’t hold your breath waiting to find out how much gold it’s holding.
It seems somewhat incongruous that, unlike most central banks, the People’s Bank of China encourages citizens to buy precious metals and pursues means of making them readily available. In light of gold’s value as a hedge against currency devaluation, one can’t help but wonder why.
Turkey’s Gold holdings
Boasting the first known coin – the slater of Lydia (6th century BC) – Turkey has a rich and ancient relationship with precious metals. A great deal of speculation abounds regarding how much silver and gold the people have stashed as personal reserves.
Turkey’s central bank has launched an all-out campaign to persuade citizens to deposit these hoards in their vaults. This is the result of two changes in the banking system. The first was that gold’s monetary stability was recognized more fully when banks were allowed to increase their gold reserves from 10% to 30%. Second, as of the fall of 2011, banks were also allowed to include any gold deposited by customers as part of their reserves.
Azerbaijan’s Gold Holdings
While it’s entirely possible you’ve not read about Azerbaijan in the headlines recently, it’s interesting to note that the largest of the Caucasus states bought almost 15 tonnes of gold last year as part of a two-year goal to acquire 30 tonnes for its reserves. Recently it’s begun taking delivery of the gold, formerly stored in JP Morgan’s London vaults, moving it to Central Bank of Azerbaijan vaults in Baku.
An Old Relationship Renewed
It’s quite evident that the relationship between the world’s central banks and gold has been changing in recent years. Just fifteen years ago, many were selling gold reserves at rock-bottom prices, seeing no real value in maintaining such vast quantities in their reserves.
Today these same countries are facing public outcry as the citizenry realizes, albeit too late, that the real sovereign wealth of their nation has been squandered by myopic monetary policies. Other central banks are aggressively increasing their gold reserves.
You, the Investor
As investors, we should take note. After a couple decades of shunning gold as a useless relic, banks are refixing their sights on the yellow metal for many reasons. Central to these is the reality that gold represents the world’s true money.
Whether we’re attempting to diversify our portfolios or hedge against inflationary fiscal policy, true money is one of the few tangible monetary investments backed up by its own intrinsic value.
Devaluation of fiat currencies highlights the importance of maintaining a sufficient gold stockpile. Central banks are embracing policies of anywhere from 5% to 90% gold reserves. Carefully consider their reasons, and whether you are sufficiently diversified.
J. Keith Johnson
for Markets and Money
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