Germany's Gold: The Background

The history behind Germany's decision to repatriate bullion...

THE WORLD'S second largest gold-holding nation is recalling some of its gold. The Germans are bringing the physical metal – once on hold outside its borders – back in country, writes Byron King for Bill Bonner's Daily Reckoning.

This is a huge development in the world gold market. But more importantly may portend a life-changing trend that gold buyers like you and I can take to the bank.

Today let's connect a few more dots, and talk gold...

Germany, Russia, Ronald Reagan, Clausewitz, this story has it all. Let's start by covering a distant memory, the Cold War.

Indeed, the Cold War is not just over, it's REALLY over. Get over it. The world is REALLY changing, and I mean in ways that you can scarcely begin to comprehend.

Yes, I know. The Soviet Union fell apart in 1991. Germany reunified – expensive as that was – and the Red Army went home to Mother Russia in the mid-1990s. (I was in Berlin, in 1991, right after I did my thing in Operation Desert Storm. Wow, I could tell you some stories about the Group of Soviet Forces in Germany, headquartered at Potsdam. Another time, perhaps.)

But now? In 2013? What's happening? There's big news, which the mainstream media evidently fails to comprehend, while they fixate on the wrong sorts of shiny stuff – "gun control," for instance, and what Hollywood celebrities think about it.

Here's the real news. Long-term, this will change your life. You paying attention?

Germany is recalling some of its central bank-owned gold from the Federal Reserve Bank in New York, as well as all "German" gold on deposit in France. It's back to der Heimat.

Let's back up. Why was German gold not in Germany? It's a monetary relic of the Cold War. Back in the 1950s-1980s, the "Federal Republic of Germany" (the Bundes Republik Deutschland, or BRD – "West" Germany) was basically a potential nuclear battlefield. So part of the monetary preparation for fighting World War III in Europe was to keep West Germany's gold away from the Russian tanks and nuclear fallout.

There was also something of a "conqueror's legacy" about it. Post-World War II, the immediate challenge to US-British-French policymakers was to keep Germany tame, considering the horrible memories of the late unpleasantness of 1939-1945. As Nobel laureate Francois Mauriac once quipped, "I love Germany so dearly that I hope there will always be two of them."

One way for the US, Britain and France to keep a leash on Germany was to keep "German" gold under control outside of that country's borders. The West German "Mark" — the national currency that predated today's Euro — was thus, to a significant extent, at the mercy of people in Washington, London and Paris.

Indeed, the German gold in New York, London and Paris was a form of conquerors' deference to maintaining "gold backing" for the Mark. It's a much longer story than this, but the point is that the policy lasted three generations.

Now, however, that issue of outside control over the German currency has come to a new turn of events. The Germans are burying the last of their grandparents who lived through World War II. And they are revisiting the rationale for storing their gold under the jurisdiction of conquering powers of World War II. There are all manner of policy implications — immediate and long term.

What will Germany do with its gold after it is back inside the traditional national boundaries? Well, we're going to find out, aren't we?

Germany is removing all of its gold from France. The publicly-stated reasoning is that there's no further reason for the French to store German gold, in that both nations are part of the "Euro" monetary union. Of course, just a glance at the past 200 years of history tells you that there's likely much more to the underlying rationale.

Germany will still keep some gold in New York and London, but only after conducting a complete inventory of every bar – by weight and assay, for each serial number. (Remember what Ronald Reagan said? "Trust, but verify.")

The monetary rationale here is that – despite what some banker-types want you to believe — gold plays a role in balancing terms of trade between Germany and the US and Britain. In other words, the Dollar-Euro and Pound-Euro exchange system works better with gold in the gearbox.

It's accurate to say that as history shows, gold goes to where it's respected. As I see things, just the idea that Germany is assaying its gold, and wants some of it back, speaks volumes. The gold will boost the credibility of the German government and its central bank, and generally strengthen the German economy for all manner of reasons.

Here's a future scenario on which to chew. Perhaps Germany might look at its gold, smile and then back out of the Euro as we know it. The effect will be to ditch the southern countries — certainly Greece, Spain and Portugal — from a "European" currency.

Then Germany will do what we all know it wants to do anyhow — that is, form a "new" Euro including the economies of northern European countries. Think in terms of an expanded version of the old Hanseatic League, perhaps, with Germany as the center of gravity. Very Clausewitz, no? And there's the possibility of offering membership to Italy (or perhaps just "northern" Italy).

Oh, and don't dismiss the possibility of a German-Russian monetary alliance. They already have a strong, and growing energy alliance. Why not start coordinating things in terms of currency as well. We'll see, right?

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