German gold coming home?

2013-JAN-16

The hot talk in the gold market over the last 24 hours is that the Bundesbank will announce moves today to repatriate a portion of its gold bullion held in New York and all of its gold in Paris. Around 45% is currently stored in New York, with 31% in Frankfurt, 13% in London and 11% in Paris. In total, the Germans claim ownership of over 270,000 bars, totalling 3,396 tonnes (the second largest official stash in the world behind the USA). This infographic provides a nice visual illustration of the quantities involved.

Further details will come out of Frankfurt later today, and of course, we’re far from any kind of confirmation of shipment and delivery. Nevertheless, parallels are being drawn with de Gaulle’s famous 1965 speech that defended the idea of gold money and attacked the Bretton Woods “dollar standard”.

Since 1958 de Gaulle’s government had been swapping dollar reserves for gold –as it was legally entitled to do under the Bretton Woods arrangement whereby all currencies were convertible into dollars at fixed rates, while the dollar was convertible into gold at the fixed price of $35 per ounce. By 1967 the proportion of the Banque de France’s foreign exchange reserves held in gold stood at 91.9% (it has since slipped back to 71.1%, though this is still well above the global average of 14.4%).

US government spending on Lyndon Johnson’s “Great Society” welfare programmes and the Vietnam War led to increasing current account deficits and growing demands for gold from European allies. This culminated with Nixon’s 1971 decision to end the dollar’s convertibility into gold, in order to preserve America’s gold stock and – in his words – “to protect the dollar”.

History doesn’t repeat, but it does rhyme. The coming years could well see similarly seismic economic events, owing to the increasing political and financial significance of gold.