Venezuela, Switzerland, Libya, Netherlands, Iran…
The announcement by the Bundesbank, the central bank of Germany, saying that it would repatriate 300 metric tons of gold held by the New York Federal Reserve raised many concerns. First, Fed attorney Scott Alvarez told Congressman Ron Paul, R-TX, during a House Subcommittee meeting in June 2011, that the Federal Reserve does not and has not held any gold bullion since 1934. Second, it appears overall trust in the United States and the global monetary system in general is waning faster than the value of the U.S. dollar. Germany also plans to repatriate all of its 374 metric tons of gold stored at the Banque de France in Paris. It is unclear what effect the Bundesbank’s move will have on the price of gold, but history tells us to prepare for a spike.
The move by the Bundesbank is not unprecedented; in fact, it has become somewhat of the rule as opposed to the exception. Venezuela President Hugo Chavez, in August 2011, ordered his country’s central bank to repatriate 85 percent of its gold reserves back to Caracas. Chavez said the move was made to safeguard the country against global economic instability. The final shipment arrived last January. Four Swiss parliament members, citing similar concerns, presented what they called a “Gold Initiative” last March. The legislation, if made into law, would bring all of Switzerland’s gold reserves back to the country and force the Swiss National Bank to reveal the secret location where the gold was stored. The Netherlands has also recently discussed repatriating all of its gold held in foreign vaults.
Libya and Iran made similar moves to repatriate their assets. Tehran is now enduring financial sanctions imposed by the United States, and Libya is re-building after NATO military operations in the country in 2011.
Physical Gold vs. Gold Certificates
Many countries “own” gold, but most of them store it somewhere outside of their own borders. Germany, for instance, has a certificate (or several of them), which says they can redeem it anytime to the New York Fed and get their gold back. But some analysts believe the Federal Reserve may only have enough physical gold in its possession to accommodate a handful of countries demanding their gold back. Global economic instability is prompting more countries to repatriate, as currencies continue to be debased due to the very liberal printing policies of the central banks. This same strategy of possessing physical gold as opposed to paper is used by investors as well. Instead of buying gold exchange-traded funds, they are now turning to distributors, such as US Money Reserve, to buy gold bullion.
What This Means for Gold Prices
If history is any indicator, the price of gold will likely continue an upward trend. Since 2009, when the global financial crisis and when countries began talking about or actually repatriating their bullion, the price of gold more than doubled from about $900 an ounce to $1889.70 by mid-2011. Some have argued that the Bundesbank’s move is more a geo-political one, as it is no longer necessary to store their gold as far away as possible from the now-defunct Soviet Union. But public outrage in Germany over a lack of real audits, seems to be more of the driving force.