A very strange thing happened last week. For the first time in 60 years, Germany has asked the New York Federal Reserve to give it back some of its gold. It also asked Paris for its yellow metal back and it may soon repatriate its gold bars from London to Frankfurt. This is Germany's gold that has only been held in vaults in New York, Paris and London, so it is perfectly entitled to ask for it back. But when countries start asking for their yellow metal it has a symbolic undertone that can cause shivers in the financial system.
Countries tend to hold gold reserves for a couple of reasons: One, in case their currency collapses and they need to get hold of dollars or pounds, both widely traded currencies, to trade with until their domestic currency stabilises. Two, if there is a concern about invasion or war. For example, one of Germany's initial reasons to store its gold reserves at the New York Fed was fears about a Soviet invasion at home during the Cold War years. It was deemed safer to store assets of significant value abroad during this time in case it needed money to fight off an attack/ invasion etc.
So what has caused Berlin's change of heart regarding its gold reserves? There are three reasons that stand out to me. Firstly, since Germany is planning on holding its reserves in future on home soil, it may suggest it is worried about a collapse or dramatic change in value in the dollar. The US has its fair share of fiscal problems including political squabbles over tax and spending policies and its enormous debt burden. The prospect of a sovereign crisis akin to the Eurozone is possible in the US, even though it may be a far-off event. Germany may be concerned that the US isn't tackling its fiscal problems head on, in contrast to Europe; thus, if and when these problems develop into a full-blown crisis, the dollar could be at risk.
The second point is that international political and financial allegiances are changing. Thus, Germany's removal of gold reserves from the US is highly symbolic and suggests that Germany's most important relationships may lie elsewhere - for example in Asia or the Middle East. Traditionally, a country tended to hold gold reserves with their largest trade partners because of the risk of a currency collapse, as I mentioned above. If you had gold reserves with a country that provided you with a lot of imports then even if your currency collapsed in value you would still have a means to pay for the goods that your economy needs. Germany is a net exporter with an important manufacturing and industrial sector. The types of imports it needs to power its economy are raw materials that may lie to its east, rather than to its west.
This move by Berlin is also symbolic of changing financial relationships. During the financial crisis in 2008 and the Eurozone sovereign debt crisis, the East - economies and rich sovereign wealth funds in Asia and the Middle East - have proven to be the most important partners as the West tries to heal its financial wounds. Thus, Germany may not feel that it can rely on the US for financial support any more; likewise, it may want to distance itself from the US so it isn't expected to stump up cash in the case of future sovereign turmoil in the US.
There is one other reason why this news is important. Germany could be living up to its stereotype of being incredibly cautious. Although the sovereign debt crisis in the Eurozone appears to be stabilizing, Berlin may be taking a precautionary step by moving its gold reserves in case it decides to leave the Eurozone and establish its own currency. To do that it may need all the gold it can get its hands on. This could also explain why it has decided to repatriate its reserves of the yellow metal from Paris: a euro without Germany could be a much weaker currency union than it is today.
This move may well prove to be a pivotal point in the world's financial history. But don't worry, things won't change overnight. Germany isn't planning on bringing back its reserves straight away; it has given itself a target of 2020. Added to that it is only bringing home half of its total gold reserves with the other half staying in vaults in New York and London.
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