The Bundesbank & the Narrative of Central Bank Omnipotence

My post yesterday on the German gold repatriation got a lot of comments pro and con. GATA picked up on my post and said that I didn't seem to think that the secrecy around it implied that something was wrong (central bank secrecy and transparency deserves its own post). I also got people telling me that it was easy to ship all the gold over in one go and therefore that lack of doing so was proof there was no gold. Before I address these issues, I want to explain my post from a different angle, which may help in people understanding my point.

Unfortunately, I was late catching up on Ben Hunt's latest piece, which I would have used as my intro to yesterday's post as it mentions gold specifically in relation to the trust and central banking club point I attempted to make.

Ben observes that "the meaning of gold [within the mainstream, goldbugs have their own narratives] has shifted from an alternative store of value to insurance against Central Bank policy error. ... gold prices will go up on ANY news – even deflationary news – IF that news creates a worker bee perception that the queen bees are rattled by the news. And vice versa, gold will go down on ANY news – even inflationary news – IF that news improves the perception that global central banks are large and in charge."

Ben has noted in past articles that a new narrative has established itself: the Narrative of Central Bank Omnipotence, where central bankers use "communications as a policy tool, and this is what Yellen (and Draghi and Abe and everyone else in the club) will continue to do ... use public statements to play the Common Knowledge Game and drive market outcomes by proxy."

The Bundesbank is part of this club and if they are seen as distrusting another central bank then they open up questioning of the Narrative of Central Bank Omnipotence, and doing so undermine their own power as well. I cannot see why they would want to make themselves impotent.

Now while I believe that the German central bankers have drunk their own kool-aid and trust the US, or as Ben Hunt says, they have internalised their behavior, "falling into what Kant called a 'dogmatic slumber'", in does not actually matter to explaining why they are repatriating in an excessively languid manner. Even if the Germans do not trust the US and wish to get their gold back as soon as possible and even if it is all there, they would still drag out the repatriation . The reason is because to request it all immediately questions the Narrative of Central Bank Omnipotence.

Victor The Cleaner pointed me to an exchange he and Motely Fool had with some Zero Hedge commenters (paraphrased by me) which explains it in another way:

"What possible action could the Bundesbank have taken that would invite more notice and speculation. The only other is asking for everything immediately as it would show an extreme lack of trust at international level between some of the most powerful entities that exist. To others it would imply that the Bundesbank knows something they don't and perhaps that the Bundesbank expected an imminent collapse. That would have sent others scrambling for gold that would crash the gold market (and others) immediately. Even though the Bundesbank would get every ounce from the Fed, just this action of asking will break things."

So unfortunately for those looking for proof that the US doesn't have their or others' gold, the rate of German repatriation does not provide this proof as the German central bankers would act the same way whether the gold was there or not, or whether they trusted the US or not.

Now on to some of the other questions raised.

Shipment Logistics

Those who think Germany could put 300 tonnes in a big plane or warship and move it in one or a few days have been watching too many Die Hard movies. As I noted yesterday, Venezuela took 4 months to get its 160 tonnes. Do you think Hugo trusted the central bankers? Don't you think he wanted to get his gold ASAP? That would translate to around 8 months in German's case.

Alternatively, consider that an armoured truck can carry only a couple of tonnes or so of gold. From an insurance point of view you couldn't get coverage for more than that anyway. So 300 tonnes at 2 tonnes a day equals 150 working days or 7.5 months. Certainly you could do two trips a day without attracting attention, so 4 months, just like Venezuela.

Some may argue that you could use non-secure trucks with heavy security. Even so we are talking 20 tonnes or so maximum weight carry capacity per truck. That is 15 trucks. Hard to secure a convoy like that I think - Google maps tells me that the trip from the Fed to JKF is 20 miles and 30 minutes. OK, so we will shut down 20 miles of roads in busy New York for this convoy with military escort. Yes that will not attract any public attention or present a Die Hard-style security risk.

However, even if this was possible, we have an additional problem. Go and watch this National Geographic documentary on the Federal Reserve, the stuff on the gold vault is at the beginning. Note the following:

1. At best they could fit two armoured trucks in their dock. No room for a big rig - are they going to forklift the gold pallets into the truck sitting out in the open on the street?

2. Look at the rabbit warren of corridors and lifts. The lift would fit only 2 tonnes of gold per go.

3. Look at the checking off process for each bar.

JohnM in the comments to yesterday's post noted that Germany's gold in the Fed "consist of 82,857 according to the report bullion stored mostly in sealed containers with 50 bars, which are kept in four separate locked safe boxes. Part of it (6183 bar) stored on open shelves, therefore in a separate vault – the so-called gold chamber."

Even if we ignore the massive amount of time it would take to just pack the open shelves gold on to pallets and then check and seal the 82,857 bars (at 15 seconds to pick up and check off each bar it would take 43 days at 8 hours a day) and ignore the fact that the Fed probably doesn't have room to store 300 x 1 tonne pallets of gold ready to ship, it would still take say 5 minutes per pallet to get "ready to ship" gold pallets out of the Fed basement and loaded on to trucks. 1500 minutes is 25 hours or 7 days. Just to load. With no breaks.

While I'd like to think the above will put an end to the idea that Germany (or anyone else) can move hundreds of tonnes of gold in a few days, I'm not hopeful, because, you know, they would have got away with it in Die Hard if it wasn't for Bruce Willis.

Now I agree that 4 months or so is a lot faster than 7 years. But as argued above, just because Germany could do it quicker, doesn't mean they would want to.

Gold Pawning

An anonymous commenter noted that "The Bundesbank also objects to this notion for another reason. It says the gold is supposed to act as an emergency buffer. In the extreme situation of a currency collapse, the bankers say that the gold bars could easily and quickly be exchanged on location for pounds or dollars to pay urgent bills."

Here the Bundesbank is talking about pawning their gold, although central bankers like to call it "swapping" as it sounds a lot more dignified. I agree with the commenter that while London and the US are major gold trading centers, for the purposes of "dollar liquidity" Germany could record an ownership change in a swap by putting book entry into the name of the US or other central bank while the gold stayed in Germany. No different to the US changing the name on Germany's gold held with them to another central bank who is "temporarily" lending Germany some cash.

If you are planning on permanently selling your gold, then yes you may need to have it in a location with a lot of trading liquidity. Even so, it is bread and butter business of bullion banks to do location swaps. But for inter central bank swaps that is not necessary (especially given the swap will be unwound in the future and the gold becomes Germany's again).

I therefore don't really see any need for any country to hold gold in trading centers if all they are looking to do is use it for swaps.

Refining

Note the un-LBMA form in which the current gold is held in at the Fed. Given the Bundesbank has argued that they need gold in the US for possible future swaps, then that assumes that they could get a swap on this non-LBMA gold. Therefore the state of the gold is not relevant to swap needs and refining/recasting of the gold into LBMA standard bars is not justified on that basis.

Nor is there a need to refine/recast as an audit/checking process. There are many non destructive tests as well as random sample bar refinings that could be performed to ensure the purity and weight of the bars.

While it would be nice to have the gold in LBMA form, that would only really matter if you were intending to sell it. Even then, bullion banks are more than happy to buy non-LBMA bars (at a discount reflecting refining cost). I can see no point in refining now when there may never be any intention to sell. The Bundesbank was happy with non-LBMA bars in the Fed all these years, why can't the non-LBMA bars happily sit in Germany's vaults?

Bar List

Carl-Ludwig Thiele, Bundesbank Board Member, said that "we have at our disposal fully documented lists of the bars, and our partner central banks send us every year confirmation not only of the bars’ existence but also of their quality."

I see no reason why this bar list could not be made public without any location or other identification information of a security risk nature. Again, a bar list of weight and purity should be sufficient for swap, LBMA or non-LBMA.

In closing I would also direct readers to the following additional points made in a Bullion Vault article:

• Bundesbank says the program only began in the autumn because contracts had to be arranged with shipping companies and refiners
• Employees of the Bundesbank supervised the bars' removal from the New York Fed crossing those bar numbers off the vault's inventory lists
• Converting non-LGD bars into market-acceptable form was done in Europe
• Bundesbank agreed to accept non-LGD gold bars into its New York Fed account in the 1960s because the run on America's gold had depleted the Federal Reserve's stockpile of Good Delivery metal and the Fed compensated the Bundesbank for both the costs incurred from the melting process and the discrepancy in the weight of the bars.