Is Germany preparing for future capital controls?

Jeff Clark, Senior Precious Metals Analyst

January 31, 2013 2:35pm GMT


The best indicator of a chess player's form is his ability to sense the climax of the game. 

-Boris Spassky, World Chess Champion, 1969-1972

You've likely heard that the German central bank announced it will begin withdrawing part of its massive gold holdings from the United States as well as all its holdings from France. By 2020, Bundesbank says it wants half its gold reserves stored in its own vault in Germany.

Why would it want to physically move the metal from New York? It's not as if US vaults are not secure, and since Germany already owns the gold, does it really matter where it sits?

You may recall that Hugo Chávez did the same thing in late 2011, repatriating much of his country's gold reserves from London. However, this isn't a third-world dictatorship; Germany is a major ally of the US. So what's going on?

Pawn to A3

On the surface, it may seem innocuous for Germany to move some pallets of gold closer to home. Some observers note that since Russia isn't likely to be invading Germany anytime soonone of the original reasons Germany had for storing its gold outside the country – the move is only natural and no big deal. But Germany's gold stash represents roughly 10% of the world's gold reserves, and the cost of moving it is not trivial, so we see greater import in the move.

The Bundesbank said the purpose of the move was to "build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold-trading centers abroad within a short space of time." It's just satisfying the worries of the commoners, in the mainstream view, as well as giving themselves the ability to complete transactions faster. As evidence that it's nothing more than this, Bundesbank points out that half of Germany's gold will remain in New York and London (the US portion of reserves will only be reduced from 45% to 37%).

Sounds reasonable. But these economists remind me of the analysts who every year claim the price of gold will fall – they can't see the bigger implications and frequently miss the forest for the trees.


What your friendly government economist doesn't reveal and the mainstream journalist doesn't report (or doesn't understand) is that in the event of a US bankruptcy, euro implosion, or similar financial catastrophe, access to gold would almost certainly be limited. If Germany were to actually need its gold, regardless of the reason, any request for transfer or sale would be difficult. There would be, at the very least, delays. At worst such requests could be denied, depending on the circumstances at the time. That's not just bad – it defeats the purpose of owning gold.

But this still doesn't capture the greater significance of this action. First, it reinforces the growing recognition that gold is money. Physical bullion isn't just a commodity, a day-trading vehicle, or even an investment.

It's a store of value, a physical hedge against monetary dislocations. In the ultimate extreme, it's something you can use to pay for goods or services when all other means fail. It is precisely those who don't recognize this historical fact who stand to lose the most in an adverse monetary event. (Hello, government economist.)

Second, here's the quote that reveals the ultimate, backstop reason for the move: Bundesbank stated it is a "pre-emptive" measure "in case of a currency crisis."

Germany's central bank thinks a currency crisis is really possible. That's a very sobering fact.

We agree, of course: history is very clear on this. No fiat currency has lasted forever.

Eventually they all fail. Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the root cause for failure is universal and inevitable: continual and perpetual dilution of the currency.

Some level of currency crisis is inescapable at this point because absolutely nothing has changed with worldwide debt levels, deficit spending, and currency printing, except that they all continue to increase. While many economists and politicians claim these actions are necessary and are leading us to recovery, it's clear we have yet to experience the fallout from spending more than we have and printing the difference. There will be serious and painful consequences, sooner or later of an inflationary nature, and the average person's standard of living will be greatly reduced.

And now there are rumblings that the Netherlands and Azerbaijan may move their gold back home. If this trend gathers steam, we could easily see a "gold run" in the same manner history has seen bank runs. Add in high inflation or a major currency event and a very ugly vicious cycle could ignite.


If other countries follow Germany's path or the mistrust between central bankers grows, the next logical step would be to clamp down on gold exports. It would be the beginning of the kind of stringent capital controls Doug Casey and a few others have warned about for years. Think about it: is it really so far-fetched to think politicians wouldn't somehow restrict the movement of gold if their currencies and/or economies were failing?

Remember, India keeps tinkering with ideas like this already.

What this means for you and me is that moving gold outside your countryespecially if you're a US citizen – could be banned. Fuel would be added to the fire by blaming gold for the dollar's ongoing weakness. Don't think you need to store gold outside your country? The metal you attempt to buy, sell, or trade within your borders could be severely regulated, taxed, tracked, or even frozen in such a crisis environment. You'd have easier access to foreign-held bullion, depending on the country and the specific events.

None of this would take place in a vacuum. Transferring dollars internationally would certainly be tightly restricted as well. Moving almost any asset across borders could be declared illegal. Even your movement outside your country could come under increased scrutiny and restriction.

The hint that all this is about to take place would be when politicians publicly declare they would do no such a thing. You could quite literally have 24 hours to make a move. If your resources were not already in place, even the most nimble of us would have a very hard time making arrangements.

Once the door is closed, attempting to move restricted assets across international borders would come with serious penalties, almost certainly including jail time. In such a tense atmosphere, you could easily be labeled an enemy of the state just for trying to remove yourself from harm's way.

The message is clear: storing some gold outside your country of residence is critical at this point, and the window of time for doing so is getting smaller. Don't just hope for the best; do something about it while you still can. The minor effort made now could pay major dividends in the future. Besides, you won't be any worse off for having some precious metals stored elsewhere.

The best chess players in the world aren't that way because they can see the next move. They're champions because they can see the next 14 moves.

You only have to see the government's next two moves to "win" this game. I suggest learning what countermoves you can take now are, before your government declares checkmate.

January 31, 2013 5:53 pm

We are not yet ready to simulate the brain
Europe’s billion-euro project is important but has an unrealistic goal, writes Gary Marcus

The 86 or so billion neurons in the human brain and the hundreds of trillions of connections between them allow us to think, walk, talk and interact with one another. It is no exaggeration to say all human nature lies within. The more we understand how it works, the better we can diagnose and treat neurological disorders from autism to Alzheimer’s.

The 10-year €1.19bn project to simulate the entire human brain, announced on Monday by the European Commission is, at about a sixth of the cost of the Large Hadron Collider, the biggest neuroscience project undertaken. It is an important, but flawed, step to a better understanding of the organ’s workings.

The flaw lies in the unrealistic goal. In the words of the science journal Nature, The Human Brain Project’s goal of a complete simulation is “a breathtaking ambition that has been met with some scepticism”. Although it would be valuableenabling researchers, for example, to test the effects of mental-health drugs – the complexity of the organ is far too intricate to be modelled accurately with today’s computers. By most estimates, this is likely to be out of reach for decades.

As neuroscientist Matteo Carandini recently observed, more than two decades of attempts to build simulations have yielded little, partly because complex systems are hard to model with sufficient precision (think about how hard it is to predict the weather two weeks hence). In the words of a classic 1972 essay by physicist P.W. Anderson: “The ability to reduce everything to simple fundamental laws does not imply the ability to start from those laws and reconstruct the universe ...

At each level of complexity entirely new properties appear.” Large-scale models are possible but the more complex they are, the greater the computational demands, and the greater the risk of error. Even if computer speed continues to double every 18-24 months, it is likely to take significantly more than a decade to reach the point at which an accurate, complete simulation is genuinely feasible.

And even if we had sufficient computing power, we do not know enough about how individual neurons work, either alone or in co-ordination with other neurons. We still lack basic knowledge, such as how memories are encoded in the brain, and it is hard to simulate what we do not understand.

Even so, it could foster a great deal of useful science. The crucial question is how the money will be spent. Much of the infrastructure developed will serve a vast number of projects, and the funding will support more than 250 scientists from more than 80 institutions, each with his or her own research agenda. A great many, such as Yadin Dudai (who specialises in memory), Seth Grant (who studies the genetics and evolution of neural function) and Stanislas Dehaene (who works on the brain basis of mathematics and consciousness), are stellar.

Still, by focusing on the newsworthy but unlikely goal of cataloguing all the brain’s individual parts, the project may squander some of its budget. By way of analogy, imagine a laptop fell to earth 500 years ago, and the world’s best scientists tried to discover how it worked. One strategy would be to dissect it, noting how the wires and transistors connect, developing tools such as microscopes and logic probes to try to fathom its complexity. Another would be to use the software to try to get a handle on what it did. One would hope to connect the two levels of understandingone functional (what the laptop does), the other physical (how the circuits work). It is doubtful one could recreate the laptop by taking measurements.

Contemporary neuroscience is filled with talk of axons, dendrites, neurotransmitters, and technical machinery such as calcium channels (which allow neurons to do their work). But too little is known about how those elements co-ordinate to mediate ideas, emotions and actions. Even basic phenomena such as short-term memory remain poorly understood. At present, the Human Brain Project seems too tilted towards physical understanding, with too little weight given to functional understanding. Truly understanding the brain will require bridging between the two.

The writer, author of ‘Guitar Zero’ and professor of psychology at New York University, writes on science and technology for

Copyright The Financial Times Limited 2013.