German Gold Reserves in New York

By Patrick A. Heller, Market Update

August 10, 2009

On March 17, 2008, the day that Bear Stearns failed, international journalist Max Keiser interviewed officials at the Bundesbank, the German central bank. Keiser’s report, released just a few days ago, contains a stunning admission. Toward the end of his report (posted at http://www.youtube.com/watch?v=EzVhzoAqMhU), Keiser stated, “The most fascinating thing I’ve learned is that all the gold in Germany is in New York.”

In the past, the Bundesbank has denied that German gold reserves were in the custody of the United States. To now reveal the truth may well cause a great controversy in German political circles.

A few years ago, Bundesbank officials admitted that it had engaged in gold swaps on behalf of another central bank, but did not identify the other party. At the time, several analysts figured that meant the Bundesbank had cooperated with the U.S. government in gold price suppression activities.

The Germans could have liquidated physical gold stored in Germany on behalf of the U.S. government and replaced it by taking title to gold stored in U.S. government vaults. It was around this time that the U.S. government completely changed its report on U.S. gold holdings from referring to them as “reserves” to calling them “Custodial gold and silver reserves.”

As I write this, it isn’t possible to predict the extent of the fallout of this revelation. At a minimum, I would expect a public outcry in Germany calling for gold reserves to be shipped back home.

Such a request could put the U.S. government on the spot, as there is some concern that the German gold reserves are no longer intact. Some or all of it may have been distributed to the public as part of gold price suppression schemes. If so, any request by the German government to return gold could cause a severe supply squeeze. To prevent a surge in gold demand sparked by this revelation, there could be significant price suppression efforts early this week.

There were other significant developments in the gold market last week.

The current Central Bank Gold Agreement was set to expire in mid-September. A new five-year agreement was adopted last week. It reduces the total limit of gold sold by the 19 signatory central banks from 500 metric tons to 400 tons per year, and specifically mentions that any sales by the International Monetary Fund are to be part of this limit. This lower limit is still excessive, as it looks like there will be only 150-200 tons of central bank gold sold in the final year of the current agreement.

While at the American Numismatic Association convention in Los Angeles last week, I asked U.S. Mint Director Edmund Moy if the Mint would be striking 2009-dated bullion-issue fractional gold American Eagles and proof silver American Eagles. He told me that the Mint is committed to issuing all of these coins. He then went on to say he could not guarantee that these would be produced because of continuing strong demand for the bullion-issue one ounce gold and silver Eagles. When someone else asked about the bullion-issue one ounce gold Buffaloes, he gave a similar answer.

At the ANA convention, classic U.S. gold coins were strong. In particular, U.S. double eagles and circulated $5 Liberty coins rose significantly in price. At least some of this demand appeared to be dealers scrambling to find other sources of supply after National Gold Exchange defaulted on deliveries when it filed for Chapter 11 bankruptcy in late July. I expect this to be a temporary boost, as eventually the collateral seized by NGE’s main creditor will be liquidated.

Dealers who had U.S. gold coins in inventory were happy with the ANA show. Dealers with generic certified Morgan and Peace dollars were enjoying very strong sales. Through Thursday, the dealers that I asked estimated that public attendance was down significantly from past years. Dealers generally told me that demand for numismatic coins was so-so, or even worse and all said general rare coin sales were below prior ANA shows. This lower attendance may have been influenced by the first-time imposition of a $6 admission charge on nonmembers in addition to the general economic woes. My own company set an all-time sales record for an ANA show, but only because we had purchased sizeable inventories of classic U.S. gold coins in the week before the show.

Last Wednesday afternoon, there was some unusual gold trading after the COMEX closed at 1:30 p.m. Eastern time. As often happens, gold prices in the thinly traded ACCESS market were knocked down several dollars. However, apparently one major buyer stepped in and quickly drove up prices by $10. This sudden jump almost certainly pushed the U.S. government and its trading partners to take extraordinary measures to hold down prices the rest of the week.

Some technical traders say their charts point to the possibility that gold could be ambushed downward one more time before gold finally passes $1,000 to stay. The gold price endured significant ambushes in March and July 2008, so it is possible. I wouldn’t count on it though.

Last week, demand from India surged at levels above $960 as jewelers built up inventory for the major sales season. Rather than waiting and hoping that there will be another significant drop, which may or may not occur, you might better make half of your purchases now, and then wait a while on the rest to see if you get lucky.

If prices never dip significantly, you at least will have some gold bought at current levels. If prices do fall, you will have the opportunity to take advantage of that with half of your funds.

Patrick A. Heller owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at its Web site: http://www.libertycoinservice.com.