The news of the Bundesbank planning to repatriate parts of its gold reserves held in New York and Paris is triggering all sorts of gloomy interpretations regarding the global monetary system.
The central bank said the repatriation of gold will enable it to achieve “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”. Said differently, the Bundesbank is finally addressing the concerns raised by the Federal Audit Office regarding lax auditing of the 3.4K tonnes of gold, which make up ¾ of Germany’s FX reserves.
The parallels with France’s 1930 and 1967 decisions to cash in its gold reserves from the UK and US respectively — as a result of unsustainable external positions in both countries are considerable to say the least. But let’s not get ahead of ourselves and remind that Germany is effectively planning to repatriate less than 1/5 of gold reserves over a period of seven years.
Nevertheless, the political considerations are greater than any market implications.
Merkel’s Pre-Election Gold Grab
As Germany heads into elections later this year, Chancellor Merkel will do all it can to avoid being tarnished by the “euro stigma” in the event of renewed macro and market deterioration. Avoiding a Greece exit was paramount to counter surging anti-European sentiment. In June 2012, Merkel was forced to relent to using ESM bailout funds for purchasing further sovereign bonds (as well as bank recapitalisation) to stabilise Italian bonds and support Spain’s banking sector. Then in September, Merkel went further by backing (silently) Draghi’s September announcement to bond purchases by making bond-purchases dependent upon ESM conditionality, while reducing the relevance of the Bundesbank’s opposition to bond purchases and simultaneously sending the ball back into court of national governments.
Last year, Merkel did her share of standing up to the Bundesbank and risking support from the anti-European segment of her CDU party to keep the Eurozone cohesive. Now, Merkel moves to bolster cohesion inside her party, auditors, reporters and anti-Europeans alike.