Gold Reserves

Germany gilds the lily

Germany's central bank likes to keep a close eye on its gold reserves. Picture source: Reuters

For a nation traumatized by the hyperinflation of the 1920s, which wiped out small savers and reduced millionaires to penury, gold is more than a relic of the past – it is an anchor for Europe’s strongest economy.

Germany has the second-largest official gold reserves in the world after the United States. Over the past few years, it has patiently repatriated gold bars stored abroad during the Cold War division of Germany so that now, three years ahead of schedule, it has reached its goal of bringing half its gold home.

The nation’s gold reserves total 3,378 metric tons – worth about €120 billion – and now half of them are stored in the vaults of Germany’s central bank, the Bundesbank, in Frankfurt. Gold accounts for nearly 70 percent of the country’s foreign exchange reserves, a level exceeded once again among major countries only by the United States, which has no need to hold US dollars, the main reserve currency for every other country.

“It is a crazy idea born of the hysteria in the wake of the euro crisis.”

Holger Schmieding, chief economist, Berenberg Bank

This compares with only 2.4 percent for China, which has relatively recently begun accumulating gold for its reserves, and 6 percent for the conservative Swiss, who have been on the cutting edge of reserve management by investing in equities rather than government bonds or precious metals.

Gold reserves are in fact something of an anomaly after US President Richard Nixon in 1971 severed the link between the dollar and gold, officially ending the quasi-gold standard of the postwar monetary system. It was that convertibility between the dollar and gold that enabled then-West Germany to accumulate gold during its postwar “economic miracle.”

For European countries, gold reserves became even more of an anomaly with the adoption of the euro at the turn of the century, eliminating the national currencies and the need for gold to back them.

None of this kept Bundesbank executive board member Carl-Ludwig Thiele from boasting this week that the repatriation of the gold ahead of schedule was “a complete success.” Half of the gold remains stored abroad, some 13 percent in London and 37 percent at the Federal Reserve in New York.

That gold will stay where it is, Mr. Thiele said, the turmoil from Brexit or the administration of President Donald Trump notwithstanding. “Absolutely nothing has changed in the relationship to the Fed,” he said, “so that we continue to have no doubt about the reputation of the Fed.”

But for at least one German economist, the whole strategy of repatriating the gold, an operation launched in 2013, is a “Schnapsidee” – a crazy idea. “It is a crazy idea born of the hysteria in the wake of the euro crisis,” said Holger Schmieding, chief economist at Berenberg Bank.

While Mr. Schmieding sympathizes with the historic attachment to gold, he feels it has little role to play in the country’s economic future. The repatriation of the gold that the Bundesbank is so proud of might make gold fans sleep better, he said, but economically it pays no dividends. On the contrary, the transport and security measures needed for the operation were just an extra expense for taxpayers.

Germany should reduce its gold holdings to 20 or 30 percent of overall reserves, Mr. Schmieding believes, a process that would take considerable time to avoid a collapse of the gold price.

That is unlikely to happen given the conservative mindset of Germany’s currency custodians. While finance ministers have occasionally sought to find a way to derive some income from the gold reserves to supplement government revenue, these efforts have come to naught.

Gold’s monetary role may indeed be a relic of the past, but precious metals continue to be an asset class appreciated by many investors, including central banks, as a means of diversification.

Even Mr. Schmieding concedes that China, for instance, is right to build up gold reserves because it has far too much of its currency reserves in US government bonds. “Basically it is behaving like a private investor,” the Berenberg economist said, “it all depends on diversification.”


Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. Matthias Streit is a correspondent for Handelsblatt. Darrell Delamaide adapted this story to English. To contact the authors:,

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