Mistrust Between Western Central Banks
While the markets were fairly ambivalent in terms of price action yesterday, there was a headline that certainly grabbed the attention of precious metals traders. Germany’s Bundesbank declared that it will repatriate a large chunk of its gold reserves from abroad in order to build public confidence. They want to pull out 300 tons of gold from the Federal Reserve in New York and 374 tons from the Bank of France with the ultimate plan being to have 50% of their gold reserves held in Germany by 2020. Given that the Bundesbank has the second largest central bank stockpile of gold (after the Fed) and is the first rational (Venezuela doesn’t count) Western central bank to want to bring their gold home, this news naturally got traders talking as to what this exactly implies for the gold market going forward.
In the short term, I don’t think the repatriation will do very much. Its effect on gold lease rates should be non-existent since, in theory, all this gold is allocated on location and was never meant to be lent in London pool metal in the first place. In the medium to longer term though, this could be a fundamental shift in the game plan of central banks and could prove to be quite bullish. Philosophically, this declaration by the Bundesbank implies mistrust between the world’s Western central banks. And if the central banks don’t have faith in one another, why should anyone else?
