It happened over and over again, in fact precisely three times, that I wrote an information request to the press department of the Deutsche Bundesbank, Germany’s central bank. All three times I wanted to know specific details about the German gold reserve held abroad. And all three times my questions were basically brushed off. Now it has happened for the fourth time that I wrote to the Bundesbank press department. But this time was different right from the beginning.

By Lars Schall

This time was different right from the beginning, as this request was the result of an interview that I did recently with Ambrose Evans-Pritchard. I’ve talked with him about the German gold reserve held abroad. The rest is pretty self-explanatory – as you will see.

The follow-up

On December 5, I wrote to the Bundesbank press department under the heading “Media Request” an email of the following content:

Dear Ladies and Gentlemen,

my name is Lars Schall, I am a freelance journalist for finance from the Ruhr area. On behalf of Matterhorn Asset Management / GoldSwitzerland in Zurich, Switzerland , I have conducted an interview with Mr. Ambrose Evans-Pritchard (in the CC), the international business editor of the British newspaper The Daily Telegraph. This interview will be published today.

During the course of the interview, I’ve asked Mr. Evans-Pritchard about his thoughts with regards to the German gold reserves stored abroad. He raised then some questions related to it, about which he said that the Bundesbank owes some answers to them. Therefore, I would like to forward these questions to you herewith.

To give you the context, here’s the relevant excerpt taken from the interview. The five extracted questions will follow afterwards. (Please note that I will add also three questions that I have myself related to the topic.)

From the interview:

L.S.: What are your thoughts on the controversial topic of the German gold reserves that are held in New York City, London and Paris?

A.E.P.: Well, I think that it is quite extraordinary that the Bundesbank pulled out two thirds of its gold from London in early 2001, I believe it was. (4) This seems an odd thing to do, I mean, they had a very large share of the gold reserves sitting in London, and why did they do this?

It happened to be a time when Gordon Brown had ordered the Bank of England to sell over half of Britain’s gold. We were doing so at the bottom of the market, I might add. We managed to create the bottom of the market, these auctions were the lowest points reached – I think 252 dollars an ounce and Britain sold off some of its gold,  a lot of it under 300 dollars; fantastically stupid thing to do in retrospect, but then Gordon Brown thought it was a “barbarous relic” and thought it had no place in modern finance. He entirely bought into the modern fiat triumphalism.

So the word going around in London is that the Bundesbank had reason to fear that those holdings were not secure anymore and that maybe the Bank of England had sold short some of its gold, leasing it out; or maybe got over extended. Clearly that didn’t prove to be the case as far as we know, but maybe they were concerned about that at the time. Apparently these gold bars in London were not numbered, so the Bundesbank was keeping un-numbered bars there. All they had was a metal account in the Bank of England. They didn’t have specific allocated bars under their name which is, I find, a completely extraordinary situation as they should have done that. I would think the Bundesbank might want to answer to its German citizens about why it was doing that.

L.S.: Well, maybe I will do it. – Another question related to this topic: have you seen any convincing reasoning why Germany should keep a large amount of its gold reserve at the New York Fed?  After all, these are 45 percent of the total amount of roughly 3.400 tons.

A.E.P.: The original argument given was because they were afraid of a Soviet tank attack over running Frankfurt in a few hours. They had to have it safe a long way away. Obviously that issue has become irrelevant. The other argument is you need it for trading, and I think a member of the executive board of the Deutsche Bundesbank, Andreas Dombret, mentioned this in fact in his speech in New York. So you need it there for trading. Well, ok, what are you doing if you are trading it, what are you doing exactly, in what way are you trading it, should a central bank be trading that stuff or should it be sitting on the asset? I think it asks for an awful lot of questions if they are keeping it in New York because they need it for trading. Then I think people might want to know what kind of trading it is and why are they trading it.

As I understood it, you might want to shift the weighting of your asset -I know the Bank of Italy very aggressively shifts its assets, so it switches from one holding to another. At one point it had a fantastic amount of sterling which it played the market beautifully; it bought sterling bonds just at the point when sterling was rising and then when sterling got too high it sold out its bonds and got some other bonds. So it plays the market beautifully. It has done a great job for the Italian citizens actually doing that. Even the Russians are doing this, they buy the dips and then sell the tops. The Russian central Bank is playing a market game with mid-term cycles.

I guess that’s what central banks are doing these days and it’s a question for German citizens, do they want their Bundesbank to generate profits as a trader buying dips and selling tops and thinking it can outsmart the market, does it just want to hold on to this stuff in case of an emergency one day. That’s a democratic choice frankly and probably not for me to answer. 

L.S.: OK, I promise to you hereby that I will ask the press department of the Bundesbank these interesting questions that you have raised as soon as our interview will be published.

A.E.P.: Well, good luck. I don’t suppose they will be terribly forthcoming. I have heard that they have been clearing out their archives to make way for more gold. So some of the archives have had to be moved to other facilities because that part of the bank is going to be storing, it sounds as if the pressure movement in Germany has had some effect if they feel they need to bring more of this back.

Here are now the five extracted questions raised by Mr. Evans-Pritchard:

1) Why did the Bundesbank pulled out large parts of its gold from London in early 2001?

Folker Hellmeyer, the chief analyst of the Bremer Landesbank, told Mr. Evans-Pritchard and me recently about his observations when he was working at the Hessische Landesbank (Helaba):                                                                                        

“Well, it’s a long time ago in the early millenium at Helaba. I don’t have any exact number on the amounts being reshifted to Frankfurt during that period as gold was not my main issue at all in central banking. At the time I was told that the BoE demanded comparatively high charges for hoarding the gold for the Bundesbank. During this period (roughly 2001) every Wednesday parts were relocated from London to Frankfurt via airfreight. That’s the info I received at that time.”

Is Mr. Hellmeyer right, or did it happen because the Bundesbank  thought that those holdings in London were not secure anymore and that maybe the Bank of England had sold short some of its gold, leasing it out; or maybe got over extended?

2) Was the Bundesbank not keeping specific allocated bars under its name in London? Is this still the case related to the rest of the gold bars in London?

3) Related to the German gold reserve held in New York City:  In what kind of trading is the Bundesbank engaged and why is the Bundesbank  trading with its gold?

4) Is the Bundesbank generating profits as a trader by buying dips and selling tops?

5) Does the Bundesbank make room for more gold coming from abroad?

Based on the information that was published during the last weeks due to the „bizarre public discussion“ (Andreas Dombret) about Germany’s gold reserve, I would like to ask three questions that arise for me personally. I see more than three questions, but let me limit them to three:

1) The Bundesbank announced that it stores parts of the gold at the known foreign locations, among other reasons, in order to guard itself against a possible currency crisis. Regarding NYC / Dollar and London / Pound this appears – at least superficially – reasonable. But what about Paris and the Banque de France? That arrangement was established before the Euro was introduced. Isn’t it then completely obsolete today? Moreover, related to all three foreign locations: Isn’t it by definition absolutely crucial to have your own gold at your own disposable at any given time in order to call it a real gold reserve? If you don’t think so, what is the Bundesbank’s definition of a real gold reserve?

2) If the Bundesbank brings a total of 150 metric tons of gold bars in the next three years to Germany for a review and melt down, what does this actually prove for the rest of it, even if these checked bars should be perfect?

3) Does the Bundesbank plan with respect to the gold stocks that are held in Germany (and are thus readily available at all time) a physical full-audit on the basis of bar lists, and when does the Bundesbank intend to make the bar lists finally public? What would be the argumentation against the one and / or the other?

Thank you very much for your attention!

Kind regards,

Lars Schall.

On December 12, Mr. Ambrose Evans-Pritchard’s questions were answered this way by Susanne Kreutzer, a press spoke person of the Deutsche Bundesbank:

1) There has never been any doubt that gold holdings stored at the Bank of England are not stored safely. Our reasons to transfer gold holdings from the Bank of England to our own vaults in 2000/2001 were entirely driven by the availability of additional storage capacity in Bundesbank vaults and a higher cost effectiveness.

2) As a basic principle, at any time all gold holdings of the Bundesbank stored at the Bank of England have been allocated bars and still are.

3) The Bundesbank does not trade with its gold reserves.

4) See answer question 3)

5) We do not comment on speculations about the storage capacities in our vaults.

My questions were answered this way:

1) No comment

2)  The Bundesbank has decided to strive for a more balanced distribution of gold reserve holdings at home and abroad, thereby taking increased account of gold`s function of preserving trust and confidence. In the next three years, the Bundesbank will repatriate 50 tons of gold annually from New York to Germany. That will give the the oportunity to inspect these bars, melt them down and convert them into „Good Delivery Standard“ bars. That will therefore be a sort of spot check.

3) The respective gold stocks are subject to regular audits. There are no reasons to publish the bar lists.

This is better than getting no answers at all. However, the answers have to be enjoyed cautiously. For example, Ms. Kreutzer says that Bundesbank does not trade with its gold reserves. But then again we have this statement by Mr. Andreas Dombret during his speech at the Reception of the Bundesbank Representative Office in New York City on November 1, 2012 regarding the German gold reserves:

“(W)e are now looking back at sixty years not only of fruitful cooperation in many fields and international fora, but also of storing gold and trading via the New York Fed. As a matter of fact, it is sensible for us to do so in New York, as Frankfurt is not a gold trading venue.“

Maybe I just don’t get it.

Anyway, the full interview with Ambrose Evans-Pritchard is posted at GoldSwitzerland here.