German Gold Repatriation 101: Interview with Economist Jerry Robinson

January 25, 2013

And so it begins… Just as it was in the days leading up to the Bretton Woods breakdown, we are witnessing a similar breakdown of global trust in the U.S. government’s ability to handle its finances. Here’s a brief interview with FTMDaily.com Editor-in-Chief, Jerry Robinson, to explain the situation.

FTMDaily: Last week, news broke out of Frankfurt that Germany was officially repatriating much of its gold from the U.S. What exactly happened?

Jerry Robinson: Germany has been facing mounting pressure to audit its national gold holdings from various political groups. Some Bundestag leaders have been infected by the growing demands and are calling on Germany to bring all of its gold held abroad back to Frankfurt. So last week Germany’s Bundesbank publicly revealed its plans to repatriate half of it’s gold reserves back to its own vaults in Frankfurt.

The politicians are caught in the ever present trap of domestic concerns vs. international diplomacy. In this case, domestic concerns won the argument.

A growing chorus of lawmakers in the Bundestag has demanded a return of all Germany’s gold in case the financial crisis escalates. Make no mistake. Germany is making a bold political statement by publicly demanding that the Federal Reserve return a large portion of its gold holdings.

And remember, Germany is still feeling burnt by Greece. As the Eurozone’s top economy, Germany has become increasingly anxious over its economic role. They cannot afford any more financial surprises. So moving the gold back from the New York Fed seems like a reasonable move to help restore a feeling of control and economic confidence in the country.

FTMDaily: Why are they leaving some of their gold in New York but none in Paris?

Frankfurt doesn’t need Paris anymore as a source of foreign currency for settlement, as both Germany and France use the Euro currency. By leaving 37% of its total gold holdings in New York and 13% in London, Germany will maintain easy access to two of the most common currencies it uses for trade: the U.S. dollar and the British pound.

Without a doubt, this will help the game of perceptions that currencies must play against one another. And it will likely be good for some re-election campaigns at the Bundestag. But it is terribly frustrating to Washington. After all, the U.S. has been perceived as holding the entire global economy together since the post-World War II era. And it is precisely because the U.S. has been viewed as an indispensable economy that this bold political move by Germany matters.

FTMDaily: So exactly how much gold is Germany moving back to Frankfurt?

Germany has 3,396 tons of gold worth roughly $200 billion, the world’s second-largest holding after the U.S. Most of the reserves were stored abroad for safety during the Cold War.

Once the Bundesbank repatriates 300 tons of its gold from New York and all of the 374 tons of gold that it keeps in Paris, exactly 50 percent of Germany’s gold reserve will be stored in Frankfurt. Thirty-seven percent of the reserve will remain in New York.

The bank will retain some reserves in London and New York for trading and liquidity purposes.

FTMDaily: How did the United States react to Germany’s request?

The Federal Reserve responded to the Germans stating that the transfer will take seven years, noting that only 5% will be in the first shipment.

FTMDaily: Does this recent repatriation move by Germany affect the current global economic arrangement? And if so, does it matter much?

I truly believe that history will look back on this event as being the beginning of the end of the US dollar as the reserve currency of choice.

There is a wave of fear sweeping the highest levels in Germany today over the safety of its gold holdings that are held abroad. While some European economists claim these fears are irrational In an unusual public move, Germany’s Bundesbank is to repatriate gold reserves held abroad to tighten control and combat currency crises in the future, pulling a chunk of its holdings from New York and all its bullion from Paris. Similar moves occurred in the years preceding the ultimate breakdown of the famed Bretton Woods system in 1971.

Without any meaningful commodity-backing, all global fiat currencies are based upon a measure of “faith.” Germany’s recent move represents a lack of faith, or more precisely, a general distrust in the current global economic arrangement.

The U.S. government’s desperate attempts to keep the petrodollar system together has backfired in the form of further alienation of emerging nations. Far East nations, for example, are privy to America’s goals and have been reacting by unifying trade and commerce amongst themselves. The U.S. has tried to apply a band-aid atop the gashing financial wounds inflicted on the global economy by their rampant excesses. The day of reckoning for the U.S. dollar is coming.

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