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Why German Gold Could Be as Good as Gone

You can imagine that what happens overseas is going to matter to Aussie stocks just as much as company earnings. The US election is in its final two weeks. And Europe’s interminable political restructuring toward a fiscal super state is grinding along in its plodding pace. Surprises are to be expected.

One big surprise, for example, is that in a real deflationary financial crisis — the kind where central bank asset purchases don’t prevent falling asset prices — your claim or ownership of assets is only as good as your possession of them. In other words, if you don’t have it, it’s not really yours.

We made the point by referring to John Exter’s inverse pyramid. You can see it below. Look for more on it next week. We’ll give you a version of the same presentation we made at the Gold Symposium on Tuesday.

Gold is at the base of Exter’s pyramid because it’s the only assets in the financial system that cannot default. Everything above it — and in a more complex version of the pyramid which we’ll show you next week, there’s A LOT above it — is either a promise to pay or someone else’s obligation — or, in some cases, a lot less liquid than physical gold (diamonds, real estate).

In a deflationary collapse, creditors and savers move down the pyramid into ‘safer’ and more liquid assets. You move down the pyramid when trust disappears in counter parties, in paper money, and the entire financial system itself. It’s not a pretty sight.

But the flight to trust makes sense if you live in a world where no one is particularly trustworthy. For example, Germany’s Federal Auditor’s Office says that Germany’s central bank needs to a do a better job of verifying that German gold held in foreign vaults actually exists. The report, cited in a Washington Post article, shows you that cracks may be forming in the façade of the global brotherhood of central banks.

The German problem began with the Soviet Empire. German gold was held in American, French, and British vaults throughout the Cold War. You can’t transfer physical gold from one account to another with a few keystrokes, at least not when you’re talking over 3,000 tonnes of gold (official German gold reserves).

The trouble is, according to the Auditor, the Bundesbank hasn’t actually seen, touched, or tasted the gold in years. It says the reserves, ‘Have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight.’ The Bundesbank relies on ‘written confirmations by the storage sites.’

If somebody tells you your cheeseburger order will be right up, it’s okay to take their word for it. If somebody tells you your nation’s gold reserves are all present and accounted for, but refuses to show you said gold, it is not okay to take their word for it.

The Bundesbank says it’s not worried about the gold at all. It has full confidence that it’s all there. And in any event, it might be logistically complicated to actually view the gold because, you know, there aren’t any viewing rooms at the Bank of England. Really.

Central banks own gold because they know it’s real money. They also know that it’s at the bottom of the pyramid, which is why the Basel III banking regulations are likely to classify gold as a Tier-1 asset in the banking system. Tier-1 is the most liquid, highest quality asset a bank can hold.

But the whole conversation is one the central bankers would rather not have. If we’re talking about gold and who owns it, it means that confidence in paper money — the main product of central banks — is waning. Gold should be seen (pretty and shiny) but not heard from, and certainly not weighed or assayed to vouch for its authenticity.

Good luck to the Germans. They will probably need it. Holding unelected officials accountable to democratic processes is getting pretty difficult in the world we live in. It will be a miracle if they get their gold back.

Regards,

Dan Denning
for The Daily Reckoning Australia

From the Archives…

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19-10-2012 – Greg Canavan

An Australian Property Boom and Bust all at Once
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The Fed’s New Stooge
17-10-2012 – Bill Bonner

Discordian Religious Advice for the Investor
16-10-2012 – Nick Hubble

Electric Cars and Platinum Mines
15-10-2012 – Dan Denning

5 Comments

  1. shortchanged says:

    My gold is the physical kind, lovely shiny sovereigns, and when I feel a scrooge moment coming on, I count it. Yes it’s all there, not some worthless bit of paper I have sleepless nights over. If I was Angela, I would hotfoot it over to where it’s supposed to be, and recover same, wouldn’t you?.

  2. Shawn says:

    It seems James Turk has correctly identified that Bundesbank has quietly taken it’s Gold from the UK banks in 2001 or so, and has leased it out as part of the scam to keep the Gold price down and hide the true nature of the inflation taxes we all face. So It’s gone and that’s confirmed.
    http://www.fgmr.com/behind-closed-doors.html

    from Turks Article “We now know what has happened. The Bundesbank has loaned 1,700 tonnes, one-half of its 3,400 tonnes reserve; the other 1,700 tonnes were swapped for gold in the US reserves, requiring the change in the West Point vault from Gold Bullion Reserve to Custodial Gold. In other words, the Bundesbank’s vault is empty because one-half of their gold is stored in West Point not Europe, and the other half has been loaned out.”

  3. Garry says:

    What, the Germans may have lost faith in their gold deposits held in Athens vaults. Sell it to Canberra, they will buy anything – a mere paper transfer to the simple minded

  4. Lachlan says:

    John Exter converted me to gold buying. Shame he is not alive to see the big ramp up.

  5. Eric says:

    Shortchanged:
    Do you really think that Merkel would try to find out where Germany’s gold is? Are you that naive? Don’t you understand that she is a major part of the problem of the missing gold, since there has been no actual accounting,Germany’s loss of sovereignty with the continuation of this foolish European Union, and sticking Germany for the bill via bailouts.
    She will accept a series of lies that all of the gold has been accounted for and close the case for good. She will allow no more discussion.
    In reality, the gold is gone, spent, to lower the price of gold and will never be returned.
    I would demand its return, make sure it is not tungsten, and return all of it to be stored within German borders. It is nice to dream!

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