Germany is the world’s second largest holder of gold, in reality they may be the biggest one, and currently holds an estimated 3,400 metric tons of gold. During the Cold War Germany moved a majority of its gold reserves out of Germany due to fears of an attack by the Soviet Union on West Germany. Given the geopolitical as well as geoeconomical problems, Germany will repatriate its gold reserves.
The German central bank, Bundesbank, has announced that it will move its gold reserves from the New York Federal Reserve and the Bank of France back to Germany. This is a major breakdown of trust between central banks and indicates less willingness to work together in order to address the problems they have helped to nourish and that it seems to be everyone for them.
The global economy is severely interconnected and this major breakdown of trust between major central banks is yet another problem which has emerged from the global financial meltdown. Market participants should not be fooled into the general consensus belief that there has been an improvement over the past five years. In actuality the situation under the surface has deteriorated drastically and the result will be a prolonged period of problems while new hotspot appear, such as this move by Germany to relocate its gold reserves to Frankfurt where they can take a look at them whenever they need.
The U.S. is thought to have the biggest global gold reserves while only a small number of individuals are aware of the fact that the U.S. sold all its gold reserves and currently attempts to keep the illusion alive that Fort Knox is filled with gold which the U.S. has accumulated over several decades. Once the news will be officially broadcasted that the U.S. has no gold reserves left global financial markets will be rattled. The U.S. maintains security in and around Fort Knox as if they were actually guarding the world’s biggest gold reserves.
Germany understands that the U.S. is potentially weeks away from default and they do not trust the U.S. Federal Reserve under the tyranny of Ben Bernanke to handle foreign gold reserves in segregation from what the Fed has planned for the U.S. They fear that the U.S. may use the reserves and issues Germany an IOU. It shows how fast and far the credibility of the U.S. as a country has fallen.
The emergence of loss of confidence in the global financial system is evident to even retail participants and Germany tries to boost the confidence as well as credibility of the Bundesbank as they want to decouple from the monetary policies favored by many of its peers. The Bundesbank understands that what the Fed as well as the ECB and BoJ favor is counterproductive and will cause more harm to the health of the system. Two Bundesbank officials have resigned from the ECB due to that.
The main unanswered question is what Germany intends to do with its gold once it is back in Frankfurt. There are speculations that they may want to sell the gold and if that is the case the follow on question is why the feel the need to liquidate its assets. This story will die in the news circuit rather fast, but market participants should not be surprised when this story resurfaces rather fast with a more drastic impact on global financial markets.
