Germany has requested that a fifth of German gold reserves in the United States, stored for free by the New York Federal Reserve, be re-patriated back to Germany. As a German citizen I was delighted to hear this and would have expected a German Navy ship to pick up the bullion within a month or two as Venezuela had done.
In monetary terms, the requested gold - 300 metric tonnes or about 9,650,000 troy ounces - is valued at about 16.3 billion USD which is not significant in paper terms as this amount barely covers four to five days of the US budget deficit. However 300 tonnes of physical gold is quite a substantial amount and cannot be procured as easily as currency. So the fact that the gold is "not immediately available" for delivery and that the proposed delivery timeline is seven years is rather disturbing and suggests that the bullion is either not there or is heavily encumbered. Furthermore a recent report by the German Federal Court of Auditors, which reported that the gold held in the US had "never been verified physically", makes this news a hot potato in Germany. You can refer to this Spiegel Article.
So is the gold there or not? The truth might just be somewhere in the middle because even if all the gold is physically stored in New York it might have been "leased out". In such a scheme the gold custodian (e.g. New York Fed) leases his customer's (e.g. Germany) gold to a third party (e.g. a bullion bank or mining company) which will pay a small interest (such as 1%) to the custodian with a promise to return the bullion on a certain date. The third party then turns around, sells the gold, and invests the proceeds in something else such as higher yielding instruments (e.g. 3% Treasury bonds).
Although the bullion was leased out, the custodian (e.g. New York Fed) will still claim the bullion to be an asset in its inventory even though the lessee has already sold the bullion. This means that the client's (Germany) gold was converted from an asset (physical gold) to a paper liability (a promise) and the asset now belongs to someone else. So the free storage that the client (Germany) is ‘enjoying’ from the custodian (New York Federal Reserve) might not be as good a deal as it seemed.
This is akin to you renting out a condominium to a tenant only to find out that the tenant, without your consent or knowledge, has sold your condo, pocketed the cash but promises to buy you a new condo in seven years' time. The scheme works beautifully as long as the client (Germany) does not ask for his physical bullion back, in which case the custodian (e.g. New York Fed) would have to get the bullion back from the lessee (e.g. bullion bank) who already sold the bullion and might not be able to return the physical asset on short notice.
Ron Paul, a former US congressman and banking oversight committee member, had been trying to introduce a bill to audit US gold holdings and its encumbrances for many years but had little success in lifting this cloud of gold secrecy. If the US House Banking Committee cannot audit the US gold holdings then we have little chance to discover the truth behind the reasons for the seven year delivery timeline.
The lessons from this should be clear however:
- Ensure that you own physical silver & gold, not paper liabilities
- Ask questions and demand transparency
- Proper storage of bullion costs money, if you get it for free you probably have not done enough to satisfy point 1 and 2