Germany’s “Gold Action” should worry the Asians more than the Americans

The Germans are in fact as afraid of the Americans as they are of themselves

When the Bundesbank called up the Fed New York last Wednesday, 16 January, to ask to take back 300 metric tonnes of its gold stored in downtown Manhattan, it sets market participants talking about the loss of confidence in the US and the dollar. In reality, the Germans are as much worried about the dollar as it is about the euro. This is why Buba has chosen to take home only half of its 3391 metric tonnes of gold, leaving 37% in New York and 13% in London. In its own words

“With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.”

While half of the gold would still be kept between New York and London, all that is now in Paris (374 tonnes) would be taken back. To this, Buba added:

“Given that France, like Germany, also has the euro as its national currency, the Bundesbank is no longer dependent on Paris as a financial centre in which to exchange gold for an international reserve currency should the need arise.”

The German gold trail – how did it end up outside?

It was a hard decision to make at this point in time when the euro zone is shrouded internally and externally by so many questions about its long-term survivability. But the Buba was under a lot of pressure from both the ordinary German and politicians to take home the gold which has been taken away from the country since the end of World War II. One report suggested that the gold could have been returned earlier if not for the Germans wanting to keep the gold safe from the Soviet Union during the Cold War. Now that all the wars outside have ended and there is instead a bigger crisis at home, the German public felt that the central bank should repossess the gold. A campaign was thus started last year, called the Gold Action, to bring home the gold which some were also concerned about the quality after so many years in storage sites which no German had inspection. So it seems it was for the need to authenticate this gold that a seven year timeline was laid out for the stipulated amount of gold to be fully returned during which some would be returned home for testing quality and weight. At the side, there was also a report suggesting that the Fed also has not inspected its own gold which is stored in Fort Knox, Kentucky. Believe it or not, it’s a norm to store your gold somewhere else – a place you would eventually think it’s safe harbour for you to escape to in times of duress. So folks – don’t put your gold under your pillow! This whole gold trail sets me imagining a James Bond movie (and as a big 007 fan, I am already furiously scripting up the next instalment now under a different pseudonym of course, like dial-a-007-wannabe).

Wanna go back to the Gold Standard – did you know your paper money is irredeemable?

Now seriously, the whole affair also sets people talking about another thing – the return to Gold Standard which means central banks around the world sets their exchange rates against some quantum of gold. Under the Gold Standard, you literally should be able to take your paper money and go to the bank and exchange it for gold. Did you know that what we are all holding – whether you are American or Singaporean – are what we call irredeemable money? People in Hong Kong can at best redeem their HKD for USD because their monetary authority runs a hard currency peg to the USD. For most of the rest of us… the money we hold is irrdeemable. There are theories expounded on this topic saying that the financial world spin out of hand because we exited the Gold Standard which really dates all the way back to the 19th Century. Bretton Woods was a half-gold-half-paper period (only the USD was backed by gold, the other currencies were backed by USD) which ultimately broke down (the US lost control of its balance of payments and couldn’t honour the gold backing to other central banks) and led us to our modern Paper Standard if we can call it that.

How so? Well, first and foremost, haven’t you realized that almost every central bank is printing money like no tomorrow? And this was because the banking machinery choked up after one bank, called Lehman, went under, and every one felt that the best way to save the rest of us from going under was to print us more money.

People still believe in paper money now because we haven’t seen real abject inflation

I don’t think we are that close to going back to the Gold Standard. These things usually take a huge global event… with a big political twist. Also, our world is still not fully inflated despite the flooding of QE. Hence, people are not that worried about the debasement of nominal currencies, just yet. It is usually when we run into hyperinflation that people tend to miss the allure of gold. So our world is still semi-deflationary because some parts like Japan and the US are still struggling to get inflation up, while others such as Singapore has already gone through several rounds of inflation.

So the Germans have started to worry about the USD and the EUR and decided to have their gold closer home. And what do we do in Asia? Our two top central banks – China and Japan – only have 1.8% and 3.5% of their reserves in gold. No doubt given that the sheer size of their reserves, this still implies a huge stash of gold – China has 1054 tonnes and Japan has 765 tonnes – in comparison to relatively smaller economies. But they are dwarfed by the amounts that their peers hold – US has 8.1k tonnes and Germany has 3.4k tonnes. So you can say, we have cash – we can use that to buy gold. Sure – if we don’t end up igniting a gold rush and the price of gold spiral away. Even Greece and Portugal have more gold than the average Asian central bank, holding about 112 tonnes and 382 tonnes respectively.

Asia should benefit most from return to a gold standard but our central banks are least prepared for it

So we in Asia better hope the world doesn’t rush back to a gold standard. Ironically, this is the part of the world where inflation is running away, thanks to the QE fiat money from the west.  Asia (consumers and investors) should have the most to gain from the world moving back to solid gold. Yet, we (our central banks) are the least prepared for this.

World official gold holding (December 2010)[12]
Rank Country/Organization Gold (tonnes) Gold’s share of national forex reserves (%)[12]
European Union European Union (incl. ECB) 10,787.4 N.A.
1 United States United States of America 8,133.5 76.6%
2 Germany Federal Republic of Germany 3,396.3 [13] 73.7%
3 International Monetary Fund logo.svg International Monetary Fund 2,814.0 N.A.
4 Italy Italian Republic 2,451.8 73.4%
5 France French Republic 2,435.4 71.8%
6 China People’s Republic of China 1,054.1 1.8%
7 Switzerland Swiss Confederation 1,040.1 15.3%
8 Russia Russian Federation 936.7 [14] 9.2%
9 Japan Japan 765.2 3.5%
10 Netherlands Kingdom of the Netherlands 612.5 61.9%
11 India Reserve Bank of India 557.7 9.6%
12 Logo European Central Bank.svg European Central Bank 502.1 35.0%
13 Iran Islamic Republic of Iran 500 [15] 19.8%
14 Taiwan Republic of China (Taiwan) 422.4 5.9%
15 Portugal Portuguese Republic 382.5 89.2%
16 Venezuela Bolivarian Republic of Venezuela 372.9 67.7%
17 Saudi Arabia Kingdom of Saudi Arabia 322.9 3.3%
18 United Kingdom United Kingdom of Great Britain and Northern Ireland 310.3 [16] 17.6%
19 Turkey Republic of Turkey 302.4[17] 15%
20 Lebanon Republic of Lebanon 286.8 32.2%
21 Spain Kingdom of Spain 281.6 39.2%
22 Austria Republic of Austria 280.0 57.0%
23 Belgium Kingdom of Belgium 227.5 41.2%
24 Algeria People’s Democratic Republic of Algeria 173.6 79.5%
25 Thailand Kingdom of Thailand 152.4 4.6%
26 Libya Libya 143.8 5.6%
27 Philippines Republic of the Philippines 142.7 10.4%
28 Singapore Republic of Singapore 127.4 3.0%
29 Sweden Kingdom of Sweden 125.7 13.6%
30 South Africa Republic of South Africa 125.0 13.8%
31 BIS-logo.PNG Bank for International Settlements 119.0 N.A.
32 Greece Bank of Greece 111.7 81.3%
33 Mexico United Mexican States 106.3 4.0%
34 Romania Romania 103.7 11.3%
35 Poland Republic of Poland 102.9 5.3%
36 Australia Commonwealth of Australia 79.9 9.5%
37 Kuwait State of Kuwait 79.0 13.8%
38 Egypt Arab Republic of Egypt 75.6 14.8%
39 Indonesia Republic of Indonesia 73.1 3.5%
40 Kazakhstan Republic of Kazakhstan 73.6 12.5%
41 Denmark Kingdom of Denmark 66.5 4.1%
42 Pakistan Islamic Republic of Pakistan 64.4 18.9%
43 Argentina Argentina 54.7 6.4%
44 Brazil Federative Republic of Brazil 52.5 0.5%
45 Bolivia Plurinational State of Bolivia 49.3 22.9%
46 Finland Republic of Finland 49.1 24.6%
47 Bulgaria Republic of Bulgaria 39.9 12.0%
48 South Korea Republic of Korea 39.4 0.7%
49 Belarus Republic of Belarus 38.5 41.4%
50 ECOWAS Flag.png West African Economic and Monetary Union 36.5 12.9%
51 Malaysia Malaysia 36.4 1.5%
52 Peru Republic of Peru 34.7 4.0%
53 Slovakia Slovakia 31.8 67.6%
54 Ukraine Ukraine 27.9 4.5%
55 Ecuador Ecuador 26.3 32.0%
56 Syria Syrian Arab Republic 25.8 7.9%
57 Morocco Kingdom of Morocco 22.0 5.6%
58 Nigeria Federal Republic of Nigeria 21.4 3.2%
59 Serbia Republic of Serbia 14.1 5.1%
60 Cyprus Republic of Cyprus 13.9 58.3%
61 Bangladesh People’s Republic of Bangladesh 13.5 7.5%
62 Netherlands Antilles Netherlands Antilles 13.1 36.3%
63 Jordan Hashemite Kingdom of Jordan 12.8 5.5%
64 Czech Republic Czech Republic 12.5 1.6%
65 Qatar State of Qatar 12.4 4.4%
66 Cambodia Kingdom of Cambodia 12.4 16.6%
67 Colombia Republic of Colombia 10.4 1.8%
68 Laos Lao People’s Democratic Republic 8.8 36.5%
69 Sri Lanka Democratic Socialist Republic of Sri Lanka 8.1 5.3%
70 Latvia Republic of Latvia 7.7 05.5%
71 El Salvador Republic of El Salvador 7.3 14.6%
72 Guatemala Republic of Guatemala 6.9 5.8%
73 Republic of Macedonia Republic of Macedonia 6.8 14.8%
74 Tunisia Tunisian Republic 6.7 4.5%
75 Republic of Ireland Ireland 6.0 15.1%
76 Nepal Federal Democratic Republic of Nepal 6.0 [18]  
77 Lithuania Republic of Lithuania 5.8 04.1%
78 Bahrain Kingdom of Bahrain 4.7  
79 Tajikistan Republic of Tajikistan 4.4  
80 Mauritius Republic of Mauritius 3.9 06.5%
81 Canada Canada 3.4 0.3%
82 Slovenia Republic of Slovenia 3.2 15.8%
83 Aruba Aruba 3.1 24.2%
84 Hungary Hungary 3.1 0.3%
85 Kyrgyzstan Kyrgyz Republic 2.6 7.5%
86 Mongolia Mongolia 2.3 4.8%
87 Luxembourg Grand Duchy of Luxembourg 2.2 10.6%
88 Suriname Republic of Suriname 2.2 13.1%
89 Hong Kong Hong Kong Special Administrative Region 2.1 0.0%
90 Iceland Republic of Iceland 2.0 01.3%
91 Papua New Guinea Independent State of Papua New Guinea 2.0 2.8%
92 Trinidad and Tobago Republic of Trinidad and Tobago 1.9 1.1%
93 Albania Republic of Albania 1.6 3.4%
94 Yemen Republic of Yemen 1.6 1.8%
95 Cameroon Republic of Cameroon 0.9 1.2%
96 Honduras Republic of Honduras 0.7 1.4%
97 Paraguay Republic of Paraguay 0.7 0.7%
98 Dominican Republic Dominican Republic 0.6 1.1%
99 Gabon Gabonese Republic 0.4 0.8%
100 Malawi Republic of Malawi 0.4 8.9%
101 Central African Republic Central African Republic 0.3 8.4%
102 Chad Republic of Chad 0.3 2.4%
103 Republic of the Congo Republic of the Congo 0.3 0.4%
104 Uruguay Oriental Republic of Uruguay 0.3 0.1%
105 Fiji Republic of Fiji 0.2 0.0%
106 Estonia Republic of Estonia 0.2 6.0%
107 Chile Republic of Chile 0.2 0.0%
108 Malta Republic of Malta 0.2 1.6%
109 Costa Rica Republic of Costa Rica 0.1 0.1%
110 Haiti Republic of Haiti 0.0 0.1%
  Sum 34,913.7

Source: World Bank