Those investors who continue to miss out on one of the world's most powerful bull markets have officially just lost one of their most commonly cited rationales for doing so. With the watershed announcement this week that Germany's Bundesbank will repatriate nearly one-fifth of the nation's gold reserves, any last claims to the failed notion that gold somehow lacks relevance in the modern day financial system have just been obliterated.
Germany's central bank will take delivery of 674 metric tons of its gold currently held in Paris and New York over the next seven years, with the stated objective of holding 50% of the nation's 3,400-ton hoard at home (compared to the 31% of its gold reserves already reported held in German vaults). This will include all 374 tons currently held in Paris, and 300 tons from the bank's major deposit at the Federal Reserve's New York vault.
An extraordinary breakdown in trust
A Bundesbank spokesman told Forbes that the bank has no intention to sell the gold, and instead characterized the move as a "pre-emptive" measure "in case of a currency crisis." The bank's official news release explained the move as follows: "With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time."
Ambrose Evans-Pritchard, international business editor for London's The Telegraph, reckons the event "marks an extraordinary breakdown in trust between leading central banks." Forbes echoed that it "raises questions as to their belief in both the strength of the global economy and the European Monetary Union, and their trust of fellow central banks." They may well be correct, but the decision is also clearly linked to a directive from Germany's Court of Auditors late last year that the central bank take measures to more effectively verify the status and purity of Germany's gold reserves. A few months ago, the bank first signaled its intention to repatriate a portion of gold reserves from New York, and then melt that gold down to test its purity. The operation announced this week, however, is on a far grander scale than that initially proposed.
A golden shield for the currency wars
The Bundesbank's timing here is truly uncanny, since it was precisely this week that worldwide rhetoric regarding the gathering pattern of "beggar-thy-neighbor" monetary policies reached an unsettling crescendo. Alexei Ulyukayev, first deputy chairman of Russia's central bank, starkly warned the world that a currency war (defined as global competitive currency devaluation) is perilously near. In the wake of accelerated asset purchases (QE4) by the U.S. Federal Reserve, combined with Japan's clear intention to engage in aggressive devaluation of the yen, several European policymakers could be heard this week championing loose monetary policy to combat strength in their respective national currencies.
The governor of South Korea's central bank, Kim Choong Soo, expressed concern over "adverse effects of monetary easing in the U.S., Europe and Japan," but nonetheless characterized his own bank's likely reaction to dramatic yen devaluation as an "active response to minimize any negative impacts on exports and investor confidence." The game of monetary hot potato that I referred to just last week in my discussion of gold and currency wars has begun to take shape, and I believe central bankers are apt to be pondering some increasingly bleak currency scenarios as they take these developments into account. In my view, the one inevitable outcome that becomes increasingly clear as these events unfold is the certainty of a major repricing event for gold as the sole global currency that cannot be printed at will.
To appreciate just how much harder it is to mint new gold than it is to print new dollars, one need only have a glimpse at the gold mining industry. IAMGOLD (NYSE:IAG) CEO Steve Letwin this week declared: "I really think now we are at Peak Gold ... Finding good, high-quality gold mines that can put out a significant amount of product is almost impossible." Former Barrick Gold (NYSE:GOLD) CEO Aaron Regent issued a similar proclamation back in 2009. Two of the industry's lowest-cost producers -- Goldcorp (NYSE:GG) and Yamana Gold (NYSE:AUY) -- both began reporting an all-in cost metric with their guidance for 2013 that suggests the average all-in cost structure for the industry will likewise be exerting upward pressure upon the prevailing gold price. Nearly a year ago, AngloGold Ashanti (NYSE:AU) CEO Mark Cutifani estimated the industry's comprehensive all-in cost structure (including the cost of capital) at $1,650 per ounce. The industry's costs have continued to climb, while recently, at least, the price of gold has not.
I believe that Germany recognizes full well that gold will play a critical role in anchoring currency markets during periods of acute distress, and that its sovereign gold reserves will represent an increasingly strategic asset. That end-game, I maintain, will necessitate a meaningful upward repricing of gold in U.S.-dollar terms; ultimately vindicating gold expert Jim Sinclair's price objective of $3,500 per ounce.
Pulling back gold's lingering veil of secrecy
The German populace exhibited a widespread understanding of gold last year when they focused intense public pressure upon the Bundesbank to answer basic and reasonable questions about the gold reserves reportedly held by the bank. Although Fed chairman Ben Bernanke escaped the efforts of Republican Rep. Ron Paul of Texas to obtain a full and independent audit of the Federal Reserve and reported U.S. gold reserves, I do note with interest that the White House's own website currently features a public petition in support of a full gold audit. Gold certainly looks to me like the most opaque and yet obviously manipulated market in all the world, and I don't think it unreasonable to request an audit of the world's largest reported sovereign stash (with a current market value of $439.3 billion).
Recognizing the notoriously secretive dealings of the official gold sector and the commercial bullion banks -- and given the historical continuum of bizarre revelations like the Belgian central bank's memorable admission that it had loaned out 41% of its sovereign gold reserves at a measly interest rate of just 0.3% -- well-informed gold investors have ample cause to suspect that official gold holdings like those that Germany stores in New York are routinely subjected to leveraged and competing ownership claims. Accordingly, the Gold Anti-Trust Action Committee characterized the Bundesbank's seven-year program as "so incomplete and slow as to increase, not diminish, doubt that all the gold is really available."
Because the repatriation will be spread out over a seven-year period, the move is not expected to have a noticeable impact upon the gold price in and of itself. But to the extent that the Bundesbank may have unwittingly prompted (or emboldened) other nations with gold on deposit at the Federal Reserve Bank of New York (or elsewhere) to follow suit, an indirect price impact could still be in the cards. The way I see it, the most immediate and irrefutable outcome of the Bundesbank's gold-repatriation program is the final debunking of the failed Keynesian construct of gold as a "barbarous relic."
I called that particular misperception the most common myth about gold back in 2009, and I am pleased that we can finally lay that myth to rest. As I said at the time: "Gold's relevance as a currency cannot be cancelled by a short-lived preference for paper." And as a parting thought, while encouraging readers to share their opinions on the topic in the comments section below, I'll leave you with the following words from former Fed Chairman Alan Greenspan: "Fiat money has no place to go but gold ... Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central bankers should pay attention to it."