Understanding the economics of gold repatriation is not overly complicated. Having previously stored gold reserves in central banks across borders, a nation decides to bring it back. But why is the stronghold of the European Union doing so?
Traditionally, a country that exchanged gold with others might want to keep some in foreign hands to reduce shipping and other transaction cost. As of late, Germany has been doing the opposite. We are going to try and understand why is Germany repatriating gold reserves and what, if anything, might change that.
However, it is certainly a national economic project that, if done progressively over a number of years, can replenish the gold reserves within Germany and offer increased economic security to the European powerhouse in the case of Eurozone breakdown (and you know what happens to the price of gold when crisis hits!).
This gold in question was always owned by Germany. In fact, the country where it was stored could not re-invest it. On the other hand, they allowed it to be stored in various reserves.
The storage of gold in foreign locations was common practice in the years prior to the Euro. Paris used to be a financial capital of Europe when each nation had their own currency. It was helpful for Germany to have gold reserves in Paris if ever they needed to exchange gold for French francs.
A plan announced in 2013 by the Bundestag laid clear the ambitions of the German government. The Bundesbank announced that by 2020 they plan to hold half of the country’s total gold reserves in Frankfurt. However, some people have suggested that the gold Germany got back wasn't the same gold it gave certain countries. According to Sputnik International, Russian Economist Vladimir Katasonov pointed out "When you leave your suitcase...you expect to get back the same suitcase. But Germany took the wrong 'suitcase'." On the other hand, if gold is gold, does it really matter? Some comments we saw say yes. In fact, it might be a sign that not only are 'paper' reserves vastly greater than gold reserves, but that national gold reserves might be lacking, too.
New York, USA
In 2012, 45% was stored at the US Federal Reserve Bank in New York. By 2020 this percentage will decrease to 37%.
A similar decrease will be seen in Paris, where 11% of Germany’s gold was being stored in 2012. By 2020, the Bundestag plans to have 0% stored in the French capital.
Aside from the 37% in New York, there will remain 13% of Germany’s gold stored in vaults under Central London. The repatriation has gone faster than planned, as at the beginning of 2018 Germany has already met their targets.
There are a lot of people speculating that repatriation is being done to prepare for impending crisis. The Brexit campaign challenges to break up the EU. According to this CNBC article, some speculate that holding all this gold means the Germans are preparing to re-instate the Deutschmark if the Eurozone breaks apart. However, there are reasons for repatriation other than preparing for a crisis.
Repatriation makes sense for Germany because they are the strongest economy in the EU and want to have has much economic leeway as they can at their fingertips. Regarding buying back all the gold reserves in Paris: now that both countries share a currency it makes more sense, from a financial security perspective, for Germany to hold the gold.
The same logic goes for reserves in New York. As the American government keeps pumping money (and thus destabilizing the American dollar), it makes more sense for the Germans to hold the gold in their own vaults and strengthen their backbone in the event of a crisis.
The relation between the pound sterling and the euro is a whole other matter. As the pound remains separate from the euro, and the risk of Brexit looms large, it makes sense for the Germans to hold gold reserves in London. That is, in case they ever need to exchange some of this gold to strengthen the euro in relation to the pound.
Selling gold reserves will make it possible for the EU to finance trade with the UK in the instance that the pound becomes much stronger than the euro. Indeed, the primary purpose of holding gold reserves is to buffer domestic currency in trade arrangements.
These are the questions you need to ask your bullion dealer to make an informed purchase and make sure that precious metals are working for you.