Gold is Money: Central Banks Send Clear Message Posted by Adam King on February 15, 2013
Germany’s Bundesbank made world headlines when it decided to repatriate a significant portion of its gold reserves held in foreign central banks, including the Federal Reserve Bank of New York and the Bank of France in Paris. With 300 tons of gold being repatriated to Frankfurt from New York, 19 percent of the Bundesbank’s holdings, valued at $36 billion, are being brought home.
Though the news came some weeks ago, the reasons behind the move deserve consideration. While central banks routinely store gold overseas in order to facilitate the exchange of currency, the decision made by the Bundesbank is clear.
Gold is money. It has the most trusted and reliable medium of exchange for the longest period of human history.
Germany publicly stated its decision was an effort to build trust and confidence in the Bundesbank, which has suffered harsh criticism domestically. Internationally, the move has been viewed as unwarranted, a transgressing of set international relations, and even illegal. The German government has been very clear it will not be selling the country’s gold. It has said, however, the pre-emptive measure should be intended to safeguard against a currency crisis, which is an indication as to the role of gold in the future.
In late 2011, Hugo Chavez announced the repatriation of Venezuelan gold, a decision that was widely seen as being motivated by fears of U.S. sanctions and frozen assets. Chavez said, however, the move was meant to safeguard against volatility in financial markets. Venezuela repatriated its gold just months before the European debt crisis spread outside the troubled nation of Greece.
While Venezuela’s decision under Chavez could be viewed as an effect of its strained relationship with the U.S., Germany’s decision is seen in a different light by the world as it is an ally of the U.S.
Russia has been increasing its gold holdings in every possible instance over the past decade. The country possesses the eighth-largest gold store in the world, nearly 938 tons valued at over $50 billion. In the year of 2012, Russia increased gold holdings just shy of 55 tons, more than 6 percent. The reason given is to diversify its foreign reserves away from paper assets it views as risky, according to Reuters.
For traders and investors, the central bank’s policy is clear and it should be taken into account when considering the role of gold in the future.