German Central Bank Holds onto Gold on Memories of Weimar Hyperinflation

By: Mark_OByrne

Gold traded sideways in Asia overnight but has fallen in early European trading. Increasing risk appetite has seen equities rally again and this is likely leading to profit taking in the gold market. With gold having increased by some $100, more than 12% in less than 10 trading days and some will be taking profits.

The market may look for guidance from the FOMC rate decision and OTC option expiry later today. The outcome of the FOMC policy meeting takes centre stage today and the committee is widely expected to leave rates unchanged at 0-0.25%. Markets will focus on the tone of its statement. The Fed is also expected to issue updated forecasts for GDP and CPI. Negative comments are possible especially after the record low consumer confidence data yesterday – this may lead to market volatility and risk aversion.

Reuters reports that German Finance Minister Peer Steinbrueck warned against the central bank selling gold reserves, after a government budget spokesman said the Bundesbank could sell gold or foreign exchange reserves in order to help finance government stimulus measures. The spokesman added that the Bundesbank had to be respected if it decided not to sell gold reserves.

"I remind all those who hastily talk about the sale of gold reserves of the negative experiences many finance politicians, including Theo Waigel," Steinbrueck said, referring to the former German finance minister. "Close coordination with the Bundesbank prevents you from falling into a media trap. I can only advise in favour of that," Steinbrueck told German daily Berliner Zeitung.

Steinbrueck, whose Social Democrats (SPD) rule in a grand coalition with Merkel's conservatives, said the Bundesbank had successfully rejected such demands in the past. Former finance minister Theo Waigel ran into a storm of protest in 1997 when he suggested revaluing Bundesbank gold reserves to help the country qualify for Europe's monetary union.

Memories of Hyperinflation
Germany, Europe's largest economy, holds around 11 percent of worldwide gold reserves. The Bundesbank currently holds around 3,400 tons of gold, worth around 70 billion euros ($92.43 billion) at current prices. Under the terms of a five-year deal between 15 European central banks, the Bundesbank has consistently passed on most of the quota it can sell each year to other institutions. The Bundesbank is the world's second-largest holder of gold after the US Federal Reserve, and has sold just 20 tonnes out of total reserves of over 3,000 tonnes in the past five years.

The German Bundesbank recently clearly stated how they view gold as an essential monetary asset.

"National gold reserves have a confidence and stability-building function for the single currency in a monetary union," the Bundesbank recently reaffirmed. The prudent bankers in the Bundesbank said that financial and political uncertainty make their gold reserves even more important than before. The German experience of the hyperinflation of the Weimar Republic makes German central bankers wary of putting all their faith in fiat paper currencies backed by nothing except by confidence in politicians and central bankers.

This is something that Gordon Brown had forgotten when he sold much of Britain’s gold reserves at the very bottom of the market (indeed the announcement in advance of the intention to sell UK gold reserves contributed to a fall in the gold price to record lows) and which may lead to considerable monetary difficulties for the British pound and sterling in the coming years.

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Rumours of gold sales (often by misguided politicians) can, and have, sometimes weakened gold prices in the short term. Hwever the reality is that the Bundesbank remains favourable (understandably in the light of historical experience) to its very considerable gold reserves and this is positive for gold in the long term.

By Mark O'Byrne, Executive Director

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