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MarketWatch permits questions about official gold reserves

Section: Daily Dispatches

Germany Wants Its Gold Back

By Barbara Kollmeyer and Sarah Turner
Tuesday, January 15, 2013

Goodbye, Big Apple. Adieu, Paris. It seems the Bundesbank could finally be ready to bow to some longstanding public pressure and bring its foreign gold reserves home.

Germany's Handeslblatt newspaper claimed Monday night that the Bundesbank has developed a new strategy that involves fewer gold bars flung afar. It seems the original reason for holding its gold at the New York Federal Reserve and other central banks -- in places for decades as a measure of security -- no longer holds up. The central bank's press office said a news conference is planned for Wednesday morning, and the topic will be gold reserves.

... Dispatch continues below ...


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The relationship between a central bank and its gold are closely watched by gold investors, since central banks hold so much of the world's gold. February gold rose $10.20, or 0.6%, to $1,680 an ounce on Tuesday, helped in part by stronger gold interest in Japan and expectations of a rising inflation outlook from the Bank of Japan. Gold has traditionally been used as a hedge against inflation, so signs of higher inflation tend to work in the metal's favor. ...

Martin Hennecke, associate director at independent investment advisory firm Tyche Group, noted stronger gold interest in Japan amid a rising inflation outlook there.

The Bank of Japan is expected to agree to newly returned Prime Minister Shinzo Abe's demand for a firm 2% inflation target, up from a current informal goal of 1%.

At the same time Chinese demand for gold through Hong Kong has been very strong, according to Hennecke, who said 2012 imports are expected to be almost twice those of 2011, exceeding Japan's entire central bank gold reserves.

The Bundesbank traditionally keeps a veil of secrecy around gold, making details on its plans eagerly anticipated.

Thorsten Polleit, Frankfurt-based chief economist at Degussa, a precious-metals firm, said the public has been long demanding an audit of the German gold reserves and repatriation of those reserves. Some fuel was thrown on that fire in the last year by the financial crisis.

"People have gotten a sense of how bad things could become and gold is the ultimate means of payment. The euro won't last forever" and "gold, for various reasons, is the anchor," Polleit said.

Polleit said that the Bundesbank hasn't had those worldwide reserves audited down to the last bar for decades, maybe never, much to the unhappiness of the public. So in a sense it may be a bit of a mystery just what is in the vaults of the New York Federal Reserve, which holds a 45% chunk of Germany's gold reserves. The Bank of England and the Bank of France hold 13% and 11% each. The Bundesbank itself holds 31% of those reserves.

By country, Germany has the largest gold holdings behind the United States.

"In recent years it's been quite popular to swap gold stocks for holding government bonds. ... There's no exact data but some fear that gold could have been lent out. It might still be there in physical terms but it's kind of hard to decide who is the actual owner," Polleit said. He said the Bundesbank has said some bars might have been checked, but not the total stock.

He said the Bundesbank has always tried to play this whole gold reserves issue down, but now they may be either poised to move more reserves out of foreign countries, or come completely clean about all of those reserves.

Still, Polleit isn't expecting some "aha" moment from the Bundesbank to have any effect on physical prices. He expects gold will hit $2,070 an ounce this year on the view that governments are printing ever-greater amounts of money.

The ZeroHedge financial blog took a grim view of any move by the Bundesbank to take its gold out of New York. Such a decision would be a sign that trust between central banks is ending.

While it's "one thing for a 'crazy, lunatic' dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most," said ZeroHedge.

Carsten Fritsch, senior commodity analyst at Commerzbank AG, said in emailed comments that the Bundesbank bringing its gold home isn't a negative for the market. "If at all, it shows that confidence in gold is rising," he said. "Gold is the currency of last resort. It is therefore better to have it at home."

Ross Norman, chief executive of precious-metals news and information provider Sharps Pixley, agreed that the Bundesbank can’t be blamed. At a time when trust in official institutions is waning, "perhaps your reserve assets are safer at home. After all, the United States reaches a debt ceiling in about six weeks and failure to see it extended would put the U.S. and the dollar in default."

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