U.S. Dollar Collapse: Where is Germany’s Gold?
By Peter Schiff
The financial world was shocked
this month by a demand from Germany’s Bundesbank to repatriate a large portion
of its gold reserves held abroad. By 2020, Germany wants 50% of its total gold
reserves back in Frankfurt – including 300 tons from the Federal Reserve. The
Bundesbank’s announcement comes just three months after the Fed refused to
submit to an audit of its holdings on Germany’s behalf. One cannot help but
wonder if the refusal triggered the demand.
Either way, Germany appears to be waking up to a reality for
which central banks around the world have been
preparing: the dollar is no longer the world’s safe-haven asset and the US
government is no longer a trustworthy banker for foreign nations. It
looks like their fears are well-grounded, given the Fed’s seeming inability to
return what is legally Germany’s gold in a timely manner. Germany is a
developed and powerful nation with the second largest gold reserves in the
world. If they can’t rely on Washington to keep its promises, who can?
Where is Germany’s Gold?
The impact of Germany’s repatriation on the dollar revolves
around an unanswered question: why will it take seven years to
complete the transfer?
The popular explanation is that the Fed has already
rehypothecated all of its gold holdings in the name of other countries. That
is, the same mound of bullion is earmarked as collateral for a host of
different lenders. Since the Fed depends on a
fractional-reserve banking system for its very existence, it would not come as
a surprise that it has become a fractional-reserve bank itself. If so,
then perhaps Germany politely asked for a seven-year timeline in order to allow
the Fed to save face, and to prevent other depositors from clamoring for their
own gold back – a ‘run’ on the Fed.
Now, the Fed can always print more dollars and buy gold on the
open market to make up for any shortfall, but such a move could substantially
increase the price of gold. The last thing the Fed needs is another gold price
spike reminding the world of the dollar’s decline.
Speculation Aside
None of these theories are substantiated, but no matter how you
slice it, Germany’s request for its gold does not bode well for the future of
the dollar. In fact, the Bundesbank’s official statements are all you need to
confirm the Germans’ waning faith in the US.
Last October, after the Bundesbank had requested an audit of its
Fed holdings, Executive Board Member Carl-Ludwig Thiele was asked in an
interview why the bank kept so much of Germany’s gold overseas. His response
emphasized the importance of the dollar as the world’s reserve currency:
Thiele’s statement can lead us to only one conclusion: by
keeping fewer reserves in the US, Germany foresees less future need for “US
dollar-denominated liquidity.”"Gold stored in your home safe is not immediately
available as collateral in case you need foreign currency. Take, for instance,
the key role that the US dollar plays as a reserve currency in the global
financial system. The gold held with the New York Fed can, in a crisis, be
pledged with the Federal Reserve Bank as collateral against US
dollar-denominated liquidity.”
History Repeats
The whole situation mirrors the late 1960s, during a period that
led up to the “Nixon Shock.” Back then, the world was on the Bretton Woods
System – an attempt on the part of Western central bankers to pin the dollar to
gold at a fixed rate, while still allowing the metal to trade privately as a
commodity. This led to a gap between the market price of gold as a commodity
and the official price available from the Treasury.
As the true value of gold separated further and further from its
official rate, the world began to realize the system was unsustainable, and
many suspected the US was not serious about maintaining a strong dollar. West
Germany moved first on these fears by redeeming its dollar reserves for gold,
followed by France, Switzerland, and others. This eventually culminated in
Nixon “closing the gold window” in 1971 by ending any link between the dollar
and gold. This “Nixon Shock” spurred chronic inflation throughout the ’70s and
a concurrent rally in gold.
Perhaps the entire international community is thinking back to
the ’60s, because Germany isn’t the only country maneuvering away from the
dollar today. The Netherlands and Azerbaijan are also discussing repatriating
their foreign gold holdings. And every month, we hear about central banks
increasing gold reserves. The latest are Russia and Kazakhstan, but in the last
year, countries from Brazil to Turkey have been adding to their gold holdings
in order to diversify away from fiat currency reserves.
And don’t forget China. Once the biggest purchaser of US bonds,
it is now a net seller of Treasuries, while simultaneously gobbling up gold.
Some sources even claim that China has unofficially surpassed Germany as the
second largest holder of gold in the world.
Unlike the ’60s, today there is no official gold window to
close. There will be no reported “shock” indicator of a dollar flight. This
demand by Germany may be the closest indicator we’re going to get. Placing
blame where it’s due, let’s call it the “Bernanke Shock.”
It Takes One to Know One
In last month’s Gold
Letter, I wrote about the three pillars supporting the US Treasury’s
persistently low interest rates: the Fed, domestic investors, and foreign
central banks – led by Japan. I examined how Japan’s plans to radically devalue
the yen may undermine that country’s ability to continue buying Treasuries,
which could cause the other pillars to become unstable as well.
While private investors and even the Fed might be deluding
themselves into believing US bonds are still a viable investment, Germany’s
repatriation news makes it clear that foreign governments are no longer buying
the propaganda. And why should they? If anyone should appreciate the real
constraints the US government is facing, it is other governments.
Our
sovereign creditors know that Ben Bernanke and Barack Obama are just regular
men in fancy suits. They know the Fed isn’t harboring some ingenious plan for
raising interest rates while successfully selling back its worthless mortgage
and government securities. Instead, the Fed is like a drug addict making any
excuse to get its next fix. [See Bernanke's tell-all
interview with Oprah where he confesses to economic doping!]
US investors should be as shocked as the Bundesbank about the
Fed’s deception. While we cannot redeem our dollars for gold with the Fed, we
can still buy gold with them in the open market. As more investors and
governments choose to save in precious metals, the dollar’s value will go into
steeper and steeper decline – thereby driving more investors into metals.
That’s when the virtuous circle upon which the dollar has coasted for a
generation will quickly turn vicious.
Peter Schiff is
president of Euro Pacific Capital and author of The Little Book
of Bull Moves in Bear Markets and Crash Proof: How
to Profit from the Coming Economic Collapse. His latest book is The Real Crash:
America’s Coming Bankruptcy, How to Save Yourself and Your Country.
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