The Germans Are Coming for Their Gold
Published:
Wednesday, 24 Oct 2012 | 5:10 PM ET
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By: John Carney
Senior Editor, CNBC.com
Senior Editor, CNBC.com
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Diamond Sky Images | Photodisc | Getty Images
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(Read more: Republicans Eye Return to Gold Standard)
For
decades, the Bundesbank has relied on written confirmation of its gold
holdings in London, Paris and New York. According to the report from the
German audit court, the last time Bundesbank officials physically
inspected the central banks gold holdings was, well, never.
(It should be stated that the folks at FT Alphaville quote a report saying an inspection took place in 1979/1980.)
Interestingly enough, the Bundesbank is apparently quite happy with taking the word of other central bankers
about the existence, location and size of its gold reserves. It put out
the word that it disagrees with the Audit Court, which only has
advisory power and cannot force the Bundesbank to follow its
recommendations, about the need for inspections. Nonetheless, the
Bundesbank is actually going to follow the recommendation that it verify
the gold stocks. It also has plans to ship some 150 tons of gold back
to Germany for a more “thorough examination.”
The
Bundesbank is, of course, quite right in its opinion of the value of
the examinations. In reality, it does not matter one bit whether the
Federal Reserve Bank of New York actually has the German central bank’s
gold or whether the gold is pure. As long as the Fed says it is there,
it is as good as there for all practical purposes to which it might be
put. It can be sold, leased out, used as collateral, employed to
extinguish liabilities and counted as bank capital just the same whether
it exists or not.
(Read more: Why Some Call Return to Gold Standard ‘Ludicrous’)
The
actual presence of the gold wouldn’t make a lick of difference unless,
say, Germany’s central bank decided it wanted to start using the gold
for some practical, non-monetary purpose like making watches.
But there’s long been a paranoia about central bank and government gold reserves. (Read more: GOP Appeased Me on Gold Standard: Rep. Ron Paul)
The
gold of the United States government, which officials say is held in
the United States Bullion Depository in Fort Knox, has been
rumored—probably since the Depository’s founding in 1937—to have been
looted and replaced with gold-painted tungsten, for instance. The
government treats this as nonsense—which it most likely is—but
nonetheless it does conduct regularly scheduled audits of the gold in
Fort Knox, including doing purity tests on a small sample of the gold.
This
paranoia is not entirely irrational, for one reason. As I mentioned
above, for almost all imaginable operational purposes, the actual
existence of the gold in Fort Knox or in the vault beneath the FRBNY’s
Liberty Street headquarters is irrelevant. The bookkeeping is what
really matters here. So long as the Fed says Bundesbank owns X tons of
gold, the Bundesbank can act as if it did own the gold—even if the gold
had somehow been swallowed into a gold-eating galactic worm hole. But
the irrelevance of the facticity of the gold does quite easily lend
itself to thinking: if the gold being there doesn’t matter, why would it
be there?
(Read more: The Gold Standard and the Myth of Price Stability)
I’m
sure the Bundesbank officials understand this quite well, even though
the German Audit Court does not. There is nothing to be gained by
inspecting the gold. If it is all there and pure, there is no difference
from an undiscovered absence. But if the gold isn’t there, well,
calamity could follow as trust in the central bank gold depositories
evaporated instantly.
In
any event, it looks like Bundesbank officials will soon be visiting the
Fed’s vault, which is located 80 feet below street level and 50 feet
below sea level. The vault is accessible only by elevators controlled by
an operator in a remote location. I’ve been told by a source that the
elevator operator is actually not in New York City at all, although I
can’t confirm this and the Fed won’t discuss this sort of thing.
Down
in the vault there are 122 compartments assigned to depositing
countries and international organizations. Smaller gold depositing
countries get shelves in shared library compartments.
The
compartments do not have labels reading “Germany’s gold” and so on.
They are instead numbered, and only a few people at the Fed know what
numbers correspond to which country. The Fed says it does this to
protect the privacy of the depositors. But this also makes actual
inspection less reliable. There’s no way for Germany to know that the
gold it is being shown is Germany’s, as opposed to some other
depositor’s. In an extreme case—which I have no reason to believe is
true—miscreants at the Fed could just show everyone who came to visit
the same pile of gold.
This is related to another mystery about gold reserves: why do they persist?
The
central banks of the world's established economic powers do not
actually do anything with their gold, apart from rare and occasional
sales of gold limited by the Washington Agreement to no more than 400
tons per year.
Some
central banks lend out their gold to speculators and gold miners (who
borrow the gold to finance mines—basically, a risk-free hedged loan
since the borrowed gold can be repaid with newly mined gold, regardless
of what happens to the price of gold on the market), which can be a
somewhat profitable activity—especially when the alternative is just
letting it sit around doing nothing but fluctuating in value with the
market price. But, as far as we know, this isn’t something the
Bundesbank or the Fed does.
When
Congressman Ron Paul recently asked Fed chair Ben Bernanke about the
rationale for central banks holding gold, Bernanke said it was the
result of “long term tradition.” But that’s not really a satisfactory
answer. The lack of a satisfactory answer actually contributes to the
suspicion that the gold isn’t really there at all. If there’s no purpose
for it, why would it be there?
So
is the German Audit Court nuts? Not necessarily. For one thing, there
probably is some value to putting to rest suspicions that the public is
being deceived about central bank gold reserves—although I doubt an
audit will really do very much in this regard. For another, there’s
always the off-chance that someone has embezzled the gold, enriching
himself unjustly. Might as well check if the gold is really there.
The
Fed wouldn’t comment on the record about how it will handle a German
request to inspect the gold. A source says they would likely work out a
deal with the Germans permitting some sort of inspection.
But
I like to imagine that the Fed officials would bring the Germans to the
door of the a compartment labeled, say, No. 322, and then pose the
question: “Are you absolutely sure you want to see what’s in here?”
- by CNBC Senior Editor John Carney
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