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Regulation & Central Bank Policy 

Gold Reserves Abroad – Germany's Gold in Foreign Hands

Dr. Mathias Kunze

Senior Consultant in Commercial and Tax Law


9 min.
Published on: 07.10.2024 | 15:11 EET

Transportation of gold to the German Federal Bank

A vision cherished by many Germans: Germany's gold on its way back home

Source: ChatGPT (OpenAI)

Germany manages one of the world's largest gold reserves, but surprisingly, a significant portion of it is not in the country itself. This circumstance is more than just a cause for concern, especially in the current world political situation.

Storing gold abroad – A historic mistake?

 

The period following World War II and the Cold War era were characterized by profound uncertainties. In the face of the threatening geopolitical constellations at the time, the relocation of German gold holdings abroad was a strategy to protect national assets from potential military conflicts. In recent years, however, global conditions have changed significantly, which is why the storage of German gold holdings abroad no longer appears appropriate.

 

The roots of foreign storage

 

In the post-war period, Germany began to store its gold reserves in the United States, the United Kingdom and France in particular. This decision was a strategic measure to secure national assets in politically and economically stable countries. A significant portion of the gold has been repatriated to Germany since 2013. On the initiative of the German Federal Bank, all the gold stored in France was transferred to Frankfurt am Main by 2017. Today, 50.6% of Germany's gold holdings are located in Germany, which corresponds to 1,710 tons of gold. The rest of Germany's gold holdings remain in storage abroad – partly at the Federal Reserve Bank of New York, where around 36% of Germany's gold reserves, or approximately 1,216 tons of gold, continue to be stored, and partly at the Bank of London, where around 12.8% of Germany's gold reserves are held, which corresponds to around 432 tons of gold. These figures not only reflect an ongoing strategic decision, but also raise questions regarding the risks and sovereignty of Germany associated with the storage of a significant portion of its reserves outside its own borders. The continued storage in New York and London is increasingly being viewed critically as it may no longer be the best strategy in a rapidly changing global situation.

 

Why the gold is still there

 

The German Federal Bank justifies the continued storage of gold reserves in New York and London with various arguments, which, however, are increasingly being met with skepticism. The supposed flexibility of being able to quickly access the reserves in these financial centers is one of the main arguments put forward by the German Federal Bank. But in an emergency – for example, in the event of a geopolitical crisis or a deterioration in diplomatic relations – Germany would probably not be able to access its gold reserves as easily or quickly. The idea that gold held abroad can be available in a crisis situation is increasingly seen as illusory.

 

Another argument is security through diversification. The German Federal Bank argues that distributing the gold across different storage locations minimizes risk. However, more and more critics are doubting whether this diversification offers real protection in an emergency. When political conflicts or economic sanctions are added to the mix, this diversification could prove to be more of a weakness than a strength. In fact, the gold reserves stored in Germany are the only ones that would be accessible in the event of a crisis.

 

The eight hidden dangers of storing gold abroad

 

Storing German gold reserves abroad is associated with numerous risks that are often underestimated. These dangers go far beyond geopolitical tensions and also affect legal, economic and security-related aspects. By storing gold reserves abroad, Germany risks eight essential factors that could be problematic for Germany in the event of crises and instabilities.

 

Political imponderables – a powder keg for Germany's gold

 

Storing a large portion of Germany's gold reserves abroad entails significant political risks. Particularly in countries such as the US and the UK, which are heavily involved in geopolitical conflicts internationally, political uncertainties can have serious consequences. Should the US or the UK become embroiled in political disputes with third countries, sanctions or diplomatic upheaval could jeopardize access to the German gold reserves. Particularly in times of increasing geopolitical tensions, such as in the Middle East, the Pacific region or due to disputes with China or Russia, Germany could find itself in a situation in which its interest’s conflict with those of the storage countries.

 

Furthermore, there is a risk that political decisions in the US or UK, for example with regard to international trade or changes in legislation, could significantly impede access to German gold reserves. It cannot be ruled out that in the event of conflicts with states that have important economic or geopolitical ties to Germany, Germany could even use its gold reserves to enforce its own interests. This makes the continued storage of German gold reserves abroad a dangerous balancing act, as Germany would not have full control over its own gold reserves if political or military crises were to arise.

 

Legal pitfalls – when laws remove control

 

Storing German gold reserves abroad is not only subject to political risks, but also to significant legal risks. Although Germany has formal ownership of the gold reserves, the actual access to this gold can be restricted by the legal framework in the host country in the event of a crisis. This particularly affects the US and the UK, which apply their own national laws and regulations.

 

If the legal regulations in the storage countries change, these changes could complicate or even block access to the gold reserves. This can become particularly critical if Germany is involved in an international conflict or political dispute that strains relations with the storage countries. Legal hurdles such as possible embargoes, sanctions or rulings by foreign courts could significantly restrict access. Any legal uncertainties beyond Germany's control therefore pose a major risk. Further legal changes or new political regulations abroad could restrict or block access to the gold. These dangers have been increasingly pointed out in recent years.

 

Economic turbulence – a financial risk

 

Storing Germany's gold reserves abroad entails significant economic risks, which relate in particular to the economic stability of the host countries. If countries such as the US or UK were to experience a severe economic crisis, capital controls or other financial restrictions could be introduced that could affect access to German gold. These restrictions could prevent Germany from quickly liquidating its gold in a crisis situation. Furthermore, there is a risk that economic instability could lead to sudden currency fluctuations that negatively impact the value of the gold reserves. In a scenario in which the US or UK were to experience financial hardship, drastic measures such as the freezing of assets could also be imposed. This would mean that Germany would not have immediate access to its own reserves at the very moment when it might urgently need them to stabilize its own economy. Such a scenario would be particularly problematic because Germany would rely on its gold reserves to create confidence in national financial stability in times of economic crisis. The fact that a large portion of these assets are stored abroad could make Germany vulnerable in such moments.

 

Logistical hurdles – the underestimated danger

 

The physical distance of Germany's gold reserves from its own territory also entails logistical risks. Should Germany decide in a crisis situation to transfer its gold reserves stored abroad to its own territory, considerable logistical challenges would have to be overcome. Moving hundreds of tons of gold is complex, expensive and subject to stringent security requirements. Every movement of gold requires not only detailed planning but also comprehensive protection and significant financial resources to ensure that it is transferred safely to the domestic vaults.

 

Furthermore, a sudden decision to repatriate may also be hampered by external circumstances such as political instability or international trade crises. There is a risk that the transport of the gold could be delayed or even made impossible if the geopolitical situation deteriorates. Such uncertainties make it clear that control over reserves stored abroad is limited and that the logistical effort could be considerable in the event of a crisis.

 

Even under normal conditions, transporting the gold would be associated with considerable costs and risks. These facts clearly argue against continued storage abroad, since in the event of a crisis, not only would access to the reserves be difficult, but their repatriation would also be accompanied by major logistical and financial challenges.

 

Risk of expropriation – When the gold no longer belongs to Germany

 

A particularly serious risk of storage abroad is the potential danger of expropriation. Should countries such as the US or UK take measures to protect their own interests in the event of a far-reaching political or economic crisis, the extreme case could arise in which foreign assets – including Germany's gold reserves – are confiscated or frozen. Such a scenario would not only be a serious violation of property rights, but would also deprive Germany of any control over a substantial part of its national reserves.

 

Historically, there are examples of states confiscating assets of foreign countries in the wake of crises or sanctions. In an unpredictable new or different world order, Germany could therefore run the risk that its gold reserves abroad will no longer be accessible for political or economic reasons. This is one of the greatest dangers, since in the event of expropriation, all diplomatic and legal means could be exhausted without Germany gaining actual access to its gold.

 

The risk of such a drastic measure may seem low, but the consequences would be devastating. As long as Germany stores its gold reserves abroad, the country remains vulnerable to possible unilateral political or economic decisions by the host countries.

 

Currency fluctuations – the underestimated financial risk

 

The storage of German gold reserves abroad entails a considerable risk from currency fluctuations. Since a large proportion of the gold is stored in the US and the UK, it is subject to the currencies of those countries – the US dollar and the British pound. Should these currencies lose value, this could reduce the actual value of the German gold reserves if they had to be converted into euros or liquidated.

 

In times of crisis or economic instability, exchange rate fluctuations can be particularly strong, making financial planning more difficult. A drastic currency loss in the countries of storage could mean that Germany has fewer financial resources available, even if the physical gold holdings remain the same. This means that access to the reserves abroad could not only be politically or legally more difficult, but also economically less valuable.

 

Furthermore, there is a risk that in a crisis, measures such as capital controls could be introduced, which could further restrict the flow of capital. In such a scenario, Germany could be forced to liquidate its reserves under unfavorable conditions, which would significantly reduce the value of the gold. This shows how dependent reserves stored in foreign currencies are on global market conditions and currency fluctuations.

 

Security gaps – An open door for thieves and terrorists

 

Storing Germany's gold reserves in foreign vaults also entails significant security risks. Even though the storage locations in the US and UK are considered very safe, they are not completely immune to threats. The risk of a targeted physical attack on these facilities – whether by terrorist organizations or criminal networks – remains. While the security measures in these vaults are high, external threats such as natural disasters, sabotage or even technical failure cannot be completely ruled out.

 

An attack on one of these storage locations could have catastrophic consequences, which would be particularly evident if parts of the gold reserves were stolen or destroyed. Although physical loss may seem unlikely, history shows that no facility is completely secure. Furthermore, there is a risk that attackers could try to use the storage locations as leverage in geopolitical conflicts to blackmail states such as Germany.

 

An additional threat is posed by the increasing dependence on digital security systems. Should hackers or other malicious actors succeed in penetrating these systems, this could compromise access to the gold reserves or even lead to sabotage. Despite heavy investment in security measures, a certain residual risk remains, which is exacerbated by the physical distance to the reserves.

 

Breach of trust – when transparency is just a word

 

Another risk of storing gold reserves abroad is the problem of a lack of transparency and a lack of trust in the actual availability and condition of the reserves. Although the German Federal Bank regularly emphasizes that German gold holdings abroad are safe, physical control and inspection by German authorities remains severely restricted. German gold reserves in the US and UK are subject only to the supervision of the respective central banks, making the direct availability of the holdings for Germany a potential source of uncertainty.

 

This lack of transparency has repeatedly led to speculation and conspiracy theories in the past. Critics question whether all of the gold is actually there or whether it has been used for other purposes or pledged. Even though the Bundesbank has taken various measures, such as comprehensive audits and inventories, to strengthen confidence in the integrity of the reserves, doubts remain.

 

Without the possibility of conducting a physical inspection at any time, Germany is dependent on the reports and trust in foreign institutions. This carries the risk that in an emergency, a wide range of uncertainties regarding the availability and condition of the gold reserves could arise. Dependence on third parties for such important national assets poses a significant risk and is another reason why storage abroad is viewed critically.

 

Repatriation debate – Why Germany should take back its gold

 

In view of the numerous risks associated with the storage of Germany's gold reserves abroad, there are growing calls for the gold to be repatriated to Germany. Critics of the continued storage in the US and UK argue that the complete repatriation of the gold would not only increase Germany's financial and economic security, but could also strengthen the trust of the population. The possibility of quickly accessing the gold in a crisis, as well as the symbolic significance of full national control over the reserves, are of central importance here.

 

Crisis security – An unshakable advantage

 

The repatriation of German gold to Germany would significantly strengthen national crisis security. In times of increasing geopolitical instability and economic uncertainty, direct access to one's own gold is invaluable. Ownership and storage in the home country allows immediate control over this significant asset without being dependent on political or legal influences from abroad. In the event of a crisis – be it due to international conflicts, economic shocks or financial emergencies – Germany can react quickly and flexibly because it is not dependent on foreign decisions or regulations.

 

The fact that the gold is fully available in the country itself also ensures that financial measures to stabilize the economy, strengthen the currency or support the financial system can be implemented immediately. This is particularly relevant in times of global crises, when other countries may take measures that could hinder access to assets abroad. For example, a geopolitical crisis between the US and another state could indirectly affect access to German gold reserves in New York, which would make crisis management more difficult.

 

Furthermore, gold plays a central role in the international financial architecture. The immediate availability of gold reserves enables Germany to act independently in global financial crises without relying on external institutions. This not only gives the country stability but also a strong negotiating position in global markets, which would be particularly reflected in the protection of national interests or in the defense of its own currency.

 

In times of crisis, Germany could also underpin confidence in its economic strength and stability by accessing the physical reserves. Gold is seen worldwide as the ultimate hedge in uncertain times. The ability to have the gold immediately available gives Germany a high degree of stability and could, in an emergency, be the difference between economic recovery and a deep downturn.

 

The complete repatriation of the gold reserves would therefore not only be a precautionary measure, but a strategic advantage that would ensure Germany extensive freedom of action and stability in times of crisis.

 

Economic independence – More than just symbolism

 

The complete repatriation of Germany's gold reserves would be a significant step towards strengthening economic independence. Storing gold abroad makes Germany somewhat dependent on the political and economic conditions in the countries where the gold is stored. As long as part of the reserves are stored in the US and the UK, Germany is subject to the laws and decisions of those countries, which can be a significant constraint in times of crisis.

 

A full repatriation would eliminate these dependencies. Germany could make economic decisions independently of international conflicts, sanctions or other political influences and use its reserves to support the national economy at any time. This is particularly important as trust in international institutions and markets can fluctuate in times of global instability. By storing the gold domestically, Germany has full control over it and can use it without fear of delays or restrictions from outside.

 

Furthermore, holding all reserves domestically would provide the option of reacting more flexibly to economic shocks or currency problems. The physical presence of the gold in its own country gives the government greater freedom to stabilize the national currency or to create confidence in the markets in times of financial uncertainty. By contrast, dependence on foreign deposits could lead to problems in times of economic instability if access to the gold were blocked by political decisions in the depository countries.

 

Building confidence – A sign to the citizens

 

The repatriation of Germany's entire gold reserves to Germany would be a strong signal to the population and a step towards building confidence in the stability of the national economy. Gold has always had a special symbolic and economic significance as it is considered a safe investment and a reserve that retains its value. Control over the country's own gold reserves not only gives the government a high degree of security, but also strengthens citizens' confidence in the state's ability to remain capable of acting in times of crisis.

 

The physical presence of the gold in one's own country creates a sense of security and independence. Especially in times of economic uncertainty, the trust of citizens is crucial for market stability. If the population knows that the gold reserves are stored in Germany and cannot be influenced by external forces, this strengthens confidence in the country's financial stability.

 

Another aspect is transparency, which is promoted by domestic storage. Citizens can be sure that the gold can be verified and secured at any time without having to rely on reports from abroad. The repatriation would thus not only be an economic advantage, but also an important sign of sovereignty and responsibility towards the population. At a time when trust in state institutions and economic stability is of central importance, the repatriation of gold reserves could play an important role in strengthening this trust.

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