Deutsche Bank commodity analysts Daniel Brebner and Xiao Fu recently weighed in on the German Bundesbank's decision to repatriate part of its gold holdings from New York and Paris back to Germany.
The decision has caused quite a stir – some took it as a sign that the Bundesbank no longer trusts the authorities at the Federal Reserve and the Banque de France with its German gold.
However, Brebner and Xiao say that many central banks have been rebalancing their gold holdings, and the Bundesbank just "happens to be a high profile example."
In fact, the Deutsche Bank analysts say the reason the Bundesbank is going to complete the repatriation process over seven years – as opposed to taking more immediate action – is to battle those very perceptions of waning trust.
Brebner and Xiao write:
Given the highly ‘charged’ or politicised nature of the gold market as it pertains to central bank actions, particularly in the Western World, central bankers are generally highly sensitive to public perception and to perceptions of trust. In our view the Bundesbank is responding in large part to the Court of Auditors, who themselves have no doubt observed the increase in value of German gold reserves and may wish to raise the standard by which gold is treated on their books.
Furthermore, we believe that the slow transfer of gold from the US Fed in NY back to Frankfurt, at 50t/year, is partly a reflection of its wish to avoid any perception of a change in confidence in the US Fed. A secondary factor could perhaps be the reluctance to put undue strain on the gold refining sector.
Moreover, the Deutsche Bank analysts say the timing makes perfect sense:
For various historical/liquidity reasons many central banks have in the past held their gold reserves in multiple jurisdictions. These reasons are, in many cases, no longer valid. This and the increased value of gold holdings combined with heightened budgetary pressures that many governments are now facing is, not surprisingly, resulting in a greater call to track assets more closely. On this basis, we believe the timing of the high profile German repatriation process is not altogether unexpected.
However, there is one issue, according to Brebner and Xiao – the gold may be there, but the quality of the gold may not be that great:
Not only will incoming bars be stored domestically however: these bars will, if necessary, also be upgraded to London Good Delivery (LGD) standards, thereby ensuring compliance with the request of the Court to ‘spot check’ their quality.
We believe much of the gold held in NY is old, known as ‘Fed Melts’ or ‘Deep Storage’ bars and may not be acceptable as is for transaction without additional processing.
The biggest impact the Bundesbank's actions have, though, according to Brebner and Xiao, is that they lend further credibility to the shiny yellow metal. The analysts conclude, " we view the repatriation and upgrade of old gold by the Western World’s central banks as a further positive in gold’s evolution as a legitimate form of money."
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