Germany and a Gold Audit

There are stories all over the internet (at least for those visiting such sites) that Germany wants to audit its gold holdings, particularly gold held by foreign governments/ central banks.  Specifically, the Audit Court in Germany is recommending that the Bundesbank, Germany’s central bank, account for all of its supposed gold holdings.

A large percentage of the gold that is held by Germany is actually stored in New York with the Federal Reserve.  Germany also has holdings in London and France.

If some kind of audit does go through, I’m not sure if it will prove anything.  Perhaps the U.S. Fed will pretend to show the gold holdings and the Bundesbank will pretend to see it and that will be the end of it.

It would actually be very difficult for Germany to account for all of its gold at this point, unless it demands physical delivery.  Germany could decide to hold all of its own gold and that is really the only way to completely verify.

The only other possible way would be to have a full audit of the gold held by the United States.  Without this, there is no way to fully trust that all of the gold is there.  If five different people give me twenty dollars to hold onto for them and each one wants to audit my holdings, then I can just show each one the same twenty dollar bill, as long as they are not there at the same time.  So I really only need to hold twenty dollars to “prove” to the five individuals that I have their money, even though I should have one hundred dollars.

It would not be surprising if the U.S. central bank has lent out some of the gold it holds.  This is the organization that encourages fractional reserve lending on a wide scale.  Why wouldn’t it do the same with its gold?

Most likely, nothing will come of this right now.  But let’s just say that Germany does demand a full audit or else a delivery of all of its gold.  If the Fed could not deliver, or if it had to buy the gold to make good on its contract, then this could mean a real boost for the gold market.  This would be the best kind of price rise possible for gold investors.  You would be getting a higher price of gold and it would not be a direct result of inflation or fear in the market.

Estimates vary, but Germany’s total holdings of gold is only approximately $170 billion.  The New York Fed holds about $78 billion worth.  This is not a big amount when you consider that the U.S. government can spend that amount in about 8 days or so.  Still, on the margin, if it was discovered that the U.S. government and/or the central bank had lent out its gold or sold it, then the gold price would likely respond with a huge rise.

So while I don’t expect much to come of this right now, it is interesting just in the fact that it is being discussed.  More and more questions are being asked and more skepticism exists of the Fed than ever before.  I guess the skepticism isn’t just in America.  In the long run, this is good news.