In the post WWII scenario, the then West Germany decided
to convert her trade surplus with USA into gold and store in the vault of US
Federal Reserve at New York. This was mandated at that time as a part of
Bretton Woods formula to ensure US capitalism stays in the lead. Does this hold now?
It is pretty clear now that neither US Dollar nor
the US led international financial system would be stable in the coming years.
America is retreating, so is the rules based order proclaimed by USA and
followed slavishly by the vassals in Europe.
At one point
Germany held most of her reserves in gold outside her shores. The
reason was to facilitate liquidity in international trade as well as for safe
keeping. After the end of Cold War resulting
in the unification of the then East Germany there was no reason to keep the
entire gold reserves in foreign banks. Subsequently a repatriation program was
undertaken thereby more than 50% got stored at the Bundesbank in Frankfurt.
Still, in order
to improve trade facilitation and liquidity, gold reserves were continued to
be held in three foreign financial centres namely US Federal Reserve Bank in
New York, Bank of England in London and the Banque de France in Paris. Approximately 35% of the gold reserves that
are held outside Germany are stored in USA alone with a book value of 1,236 tonnes
of gold, valued at over €100.
Whereas both London
& Paris are deemed suitable locations for gold reserves concerns are
being expressed loud and clear as regards to reserves held in USA. One reason
is, US is no longer the largest trading partner of Germany which position now
goes to China. By the end of 2025 China has emerged as lead partner with two
way trade exceeding USD 190 Billion. Besides, German companies up ticked their
investment in China, of late.
Erratic behaviour
of Donald Trump has become by and large the major irritant
in cross Atlantic relations, especially between Germany and USA. As far as liquidity
and safety are concerned America is fast becoming a risky destination to hold gold
reserves.
Navigating strategy
amid geoeconomics dictate that Germany transfers her gold reserves stored in New
York to Beijing to capitalize on easy access of gold storing and trading. By
the way, Germany has significant trade deficit in China trade and holding gold
reserves in Chines bank would be an ideal solution in ensuring smooth transactions.
More than anything else, Shanghai Gold Exchange in China offers gold purchases in Yuan as well as Euro and other currencies. Unlike in the case of US banks, China offers guarantee in purchase, sale, storage and repatriation of gold in short notice.
Cheers!
Muthu Ashraff Rajulu
Strategy Adviser
Mobile: + 94 777 265677
E-mail: cosmicgems@gmail.com
Blog: Strategy Adviser
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