The financial world was shocked this month by a demand from Germany’s Bundesbank to repatriate a large portion of its gold reserves held abroad. By 2020, Germany wants 50% of its total gold reserves back in Frankfurt — including 300 tons from the Federal Reserve. The Bundesbank’s announcement comes just three months after the Fed refused to submit to an audit of its holdings on Germany’s behalf. One cannot help but wonder if the refusal triggered the demand.
Either way, Germany appears to be waking up to a reality for which central banks around the world have been preparing: the dollar is no longer the world’s safe-haven asset and the US government is no longer a trustworthy banker for foreign nations. It looks like their fears are well-grounded, given the Fed’s seeming inability to return what is legally Germany’s gold in a timely manner. Germany is a developed and powerful nation with the second largest gold reserves in the world. If they can’t rely on Washington to keep its promises, who can?
Where is Germany’s Gold?
The impact of Germany’s repatriation on the dollar revolves around an unanswered question: why will it take seven years to complete the transfer?
The popular explanation is that the Fed has already rehypothecated all of its gold holdings in the name of other countries. That is, the same mound of bullion is earmarked as collateral for a host of different lenders. Since the Fed depends on a fractional-reserve banking system for its very existence, it would not come as a surprise that it has become a fractional-reserve bank itself. If so, then perhaps Germany politely asked for a seven-year timeline in order to allow the Fed to save face, and to prevent other depositors from clamoring for their own gold back — a ‘run’ on the Fed.
Now, the Fed can always print more dollars and buy gold on the open market to make up for any shortfall, but such a move could substantially increase the price of gold. The last thing the Fed needs is another gold price spike reminding the world of the dollar’s decline.
None of these theories are substantiated, but no matter how you slice it, Germany’s request for its gold does not bode well for the future of the dollar. In fact, the Bundesbank’s official statements are all you need to confirm the Germans’ waning faith in the US.
Last October, after the Bundesbank had requested an audit of its Fed holdings, Executive Board Member Carl-Ludwig Thiele was asked in an interview why the bank kept so much of Germany’s gold overseas. His response emphasized the importance of the dollar as the world’s reserve currency:
“Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity.”
Thiele’s statement can lead us to only one conclusion: by keeping fewer reserves in the US, Germany foresees less future need for “US dollar-denominated liquidity.”
The whole situation mirrors the late 1960s, during a period that led up to the “Nixon Shock.” Back then, the world was on the Bretton Woods System — an attempt on the part of Western central bankers to pin the dollar to gold at a fixed rate, while still allowing the metal to trade privately as a commodity. This led to a gap between the market price of gold as a commodity and the official price available from the Treasury.
As the true value of gold separated further and further from its official rate, the world began to realize the system was unsustainable, and many suspected the US was not serious about maintaining a strong dollar. West Germany moved first on these fears by redeeming its dollar reserves for gold, followed by France, Switzerland, and others. This eventually culminated in Nixon “closing the gold window” in 1971 by ending any link between the dollar and gold. This “Nixon Shock” spurred chronic inflation throughout the ’70s and a concurrent rally in gold.
Perhaps the entire international community is thinking back to the ’60s, because Germany isn’t the only country maneuvering away from the dollar today. The Netherlands and Azerbaijan are also discussing repatriating their foreign gold holdings. And every month, we hear about central banks increasing gold reserves. The latest are Russia and Kazakhstan, but in the last year, countries from Brazil to Turkey have been adding to their gold holdings in order to diversify away from fiat currency reserves.
And don’t forget China. Once the biggest purchaser of US bonds, it is now a net seller of Treasuries, while simultaneously gobbling up gold. Some sources even claim that China has unofficially surpassed Germany as the second largest holder of gold in the world.
Unlike the ’60s, today there is no official gold window to close. There will be no reported “shock” indicator of a dollar flight. This demand by Germany may be the closest indicator we’re going to get. Placing blame where it’s due, let’s call it the “Bernanke Shock.”
It Takes One to Know One
In last month’s Gold Letter, I wrote about the three pillars supporting the US Treasury’s persistently low interest rates: the Fed, domestic investors, and foreign central banks — led by Japan. I examined how Japan’s plans to radically devalue the yen may undermine that country’s ability to continue buying Treasuries, which could cause the other pillars to become unstable as well.
While private investors and even the Fed might be deluding themselves into believing US bonds are still a viable investment, Germany’s repatriation news makes it clear that foreign governments are no longer buying the propaganda. And why should they? If anyone should appreciate the real constraints the US government is facing, it is other governments.
Our sovereign creditors know that Ben Bernanke and Barack Obama are just regular men in fancy suits. They know the Fed isn’t harboring some ingenious plan for raising interest rates while successfully selling back its worthless mortgage and government securities. Instead, the Fed is like a drug addict making any excuse to get its next fix. [See Bernanke’s tell-all interview with Oprah where he confesses to economic doping!]
US investors should be as shocked as the Bundesbank about the Fed’s deception. While we cannot redeem our dollars for gold with the Fed, we can still buy gold with them in the open market. As more investors and governments choose to save in precious metals, the dollar’s value will go into steeper and steeper decline — thereby driving more investors into metals. That’s when the virtuous circle upon which the dollar has coasted for a generation will quickly turn vicious.
Peter Schifffor The Daily Reckoning
Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.
Click here for a free subscription to Peter Schiff’s Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts.
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For further reading, please check out Peter’s excellent book How an Economy Grows and Why it Crashes, available now from Laissez-Faire Books.
good article !! thanks Peter !!
…Germany is a developed and powerful nation… and they rely on Washington.. and Bundesbank “decide” about something… – Bitte?
Germany is 100% US colony. With 70 000 JI onits soil. More than in Irak. Die Bundesbank can “decide” maybe about the color of his walls. But surely NOT about money or even “germane” gold. The “Handelsblatt” propose on the first page to ..”tilt the gold in atlantice” or buy with it something “useful” “what pays interest”. If in BRD – “GERMANY” is something that just not exist,-wy use this word?- the chifindianer of big newspapire allowed to write something like that, you could be sure, it is ALREADY DECIDED ALL about “germane gold”. (It will be sold/exchanged for EU obligationen and such garbage).
Not every “Country” you can find on the map and have a “President” can decide something. What is next? Pakistan Irak Libien Afghanistan “decide” about something?
The dollar, pound, yen etc fluctuate freely in the foreign exchange market. Speculators buy and sell every day. Sophisticated investors know that paper money is dangerous. They can use paper currencies to buy gold, real estate, oil or stocks. Voters in the US want soft money falling in value. That is why they continue to elect politicians who spend, borrow and print. All Americans will pay the price of those choices-stagflation. Voters want to do the 1930s and then the 1970s. Voters are not ready to repeat 1980-2000. American voters will not change until gas is more than $10 per gallon, inflation is above 1-2% per month. When the social security trust funds have been expended completely maybe voters will take a fresh look.
Trustworthiness … waning faith ……
Reminded me of the reality. Are you that miserable? To the degree that
others must be equally miserable to satiate your discerning eyes?
Some guys may be harbouring some scicentific lust adoring thomas
addision or newton as their targeted scientific idols. They are, maybe, only
conducting one or two fire-cracker blast in the backyard football
fields in updating their political science. Maybe, it need not be overreactive
to the degree of applying stringent diet and shaping the poor guy into
bamboo species. Any mischief or threat that could be befallen on your
head could always be answered with your resourceful TNT from the
monumental inventory. Tranquilliser could alleviate overheated nerve
and it is a proven safe medicine.
Then, with the continuing zombie game, confidence does not come easy.
One way or another, to die honourably in the battlefield, or, the other
option i.e cowardly manipulating zombies to achievement.
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Get a grip folks. Germany is making decisions now, to put the Mark on the gold standard. The Swiss Frank is backed by gold. However the Swiss will not allow the Frank to be traded for gold, only the currency of the bearers choice. The Frank is tied to the Swiss. Expect Germany to do the same.
I see this morning on television that the US is exporting so much oil now in its trade balance that it is running a trade SURPLUS, just like a Middle East nation. Oh, I wonder if I am seeing things correctly or if my brain surgery is making me crazy again…. because if what I see this morning is correct, it’s time to sell gold, sell homes, sell inflation hedges and BUY bucks. ( Nothing could serve the devils in the Middle East better than what I see this morning, if this is portends the beginning of a big reversal of their big holiday against America. )
$ 35/ounce gold is worth how much now????? A tiny $17,900 bungalow in San Jose, California is worth how much now????? Being the slow learner here who sits in the back of the classroom……I need some help.
There is so much oil under North America, the entire continent is floating on oil. The only thing we have to do is frack the shale open, and fracking the shale open is easy to do. The oil is leaking out onto the ground and into the watersheds in California; my goodness: in San Benito County, Monterey County, Kern County, Los Angeles County, Fresno County, and many other counties in California.
We would have had the oil exports and trade surplus that Canada and America deserve if the Sierra Club and Greenpeace and the other arrogant environmental groups would have been told to f-off years ago. We should have been busting through shale decades ago, and not just beginning on the process now.
From what geologists can tell now, there is oil and gas to be taken profitably everywhere under North America, and apparently coal near the surface too.
Peter Schiff is a national treasure…thank you for your insightful and truthful articles…much appreciated
Now when there is no heat in the grocery stores and people have children and babies and have to wear parkas and papooses here in central California to shop, and now ( something like in a backward and failing turd-world country, maybe in remote highland central Asia ) the voters in America have finally have made their wise decision to get rid of the Republicans and the conservatives in Washington and for several elections, whatever they say or promise, however good, bad, or indifferent.
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SS is exxpended. Congress has spent it all and they can’t afford to pay it back.
Just seeing some fixed-up and painted (junk) Victorian homes on the San Jose/Los Gatos Road a week ago, and they are now $1,500,000. Am I crazy, or has Silicon Valley gone mad?
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