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Why Austria Is Repatriating Gold From London
... China's gold market should move from commodity trade to financial product trade. Gold is a commodity that combines the attributes of a currency, financial commodity and general commodity. … gold still has a strong financial nature and remains an indispensable investment tool. In financial centers in the world, the gold market - together with the money market, securities market and FX market - constitutes the main part of the financial market.Obviously, all these central banks are aware what the future will hold. How else can we explain Europe's repatriating gold policy and Asia's buying gold policy?
When it becomes serious, you have to lie.(click to enlarge)Peter Mooslechner and Daniela Cambone. Courtesy Kitco News.
I want to talk to you about the role of gold in a central bank. Is it loosing appeal in the role it plays in a central bank, or is it gaining ground? How do see you gold.Interesting. Mooslechner states that his central bank views its 280 tonnes of gold as "the basic part of reserves". This is in line with the Balance of Payments and International Investment Position Manual (BPM6) drafted by the IMF, in which gold is regarded as "the only case of a financial asset with no counterpart liability", and is therefore, listed at the top of all reserve assets - above SDRs.
I think it differs a lot. For a small central bank like we are, and we have joined the Eurosystem some time ago, the role of gold has significantly changed. It was of big importance during the period of the Bretton Woods System, it played a very active role also in the management of our overall reserves. But having become now part of a much greater monetary and economic area, it has transformed into something like the basic part of reserves to be hold for as a liquidity buffer or for security reasons, but not so much an active part of management of gold reserves anymore.
...Apparently, the Austrian central bank's gold policy is communicated in strategic "uhm... documents". I wonder if these documents are publicly accessible? I guess not.
Does the Austrian central bank have plans to increase its gold reserves? Last estimates were 43.9 %.
We don't think so that we have to increase, because we are now part of the much bigger intervening power of the Eurosystem and the ECB. But what we have decided in the last strategic... uhm... documents, is to keep the share of gold and the amount of gold constant for the time being.
Cambone:Mooslechner states the Austrian central bank (OeNB) will repatriate its gold from the BOE because of a concentration risk in London, while at the same time, he states the BOE is the best place to store gold. This contradiction indicates his answer is nonsense. The BOE cannot be the best place for foreign central banks to store official gold reserves, or Mooslechner wouldn't take the effort to repatriate. Aside from the contradiction, in 1976 there were more than 12,000 tonnes of gold stored at the Federal Reserve Bank of New York for foreign central banks. Did anybody complain about a concentration risk at the time? Why are European countries currently repatriating official gold reserves due to concentration risks, but didn't complain about concentration risks in the past decades when their gold was stored in London and New York as well? The argument to repatriate gold because of concentration risks is an excuse.
You want to repatriate 3.5 billion pounds of the gold, which is currently in the UK, moving it back to Austria over the course of five years. Why did you decide on this move?
This goes back to a request by our general court of auditors, they thought that the concentration of our gold holdings at the Bank Of England [BOE] is a little bit too high and they wanted us to reduce concentration risk there. Frankly speaking, we didn't see much of a concentration risk because the Bank Of England is the best place to be, but we decided to go a little bit more in the direction of diversification, so we'll bring a little bit back to Austria, in fact, in the end 50 % of our gold holdings should be kept in Austria and we will also stock up our holdings in Switzerland, from the original part, which is held by the Bank Of England in London.
... the gold depository contract with the depository in England [BOE] contained deficiencies. As regards the gold reserves stored abroad, internal auditing measures were lacking.
The OeNB had no appropriate concept to perform audits of its gold reserves... The lack of audit measures represented a gap in the internal control procedures of the OeNB.
Cambone:Yes, Daniela ask him! In 2011, Germany's central bank Executive Board Member Carl-Ludwig Thiele testified to the German parliament's budget committee, "We're in negotiations with our partner central banks [the Federal Reserve Bank of New York and the Bank Of England] to develop auditing rights", according to Bloomberg. This sounds like the exact same problem the Austrians ran into in London. Maybe, just maybe, this is all connected. Let's read what Mooslechner answered:
It seems that Germany started the movement one day asked for the gold back that was held in New York, you think that had anything to do with it? Because we so many other countries follow suit after Germany's announcement.
Mooslechner:A few seconds ago, Mooslechner stated that OeNB is repatriating because the Austrian general court of auditors observed concentration risks at the BOE. Now he turns around and states Austria is repatriating because of economic nationalism. If we take into account that OeNB has been working on securing its gold bullion since at least 2009 and tried to audit its gold in vain, economic nationalism sounds more like a genuine reason to repatriate than concentration risks. Mooslechner is actually saying OeNB prefers to store its gold on its own soil, instead of storing it abroad and risk a foreign institution (BOE) to use the gold at its own discretion. If the BOE would be capable of doing such things, no wonder OeNB was not granted any auditing rights.
Perhaps this could be also be labeled as some sort of economic nationalism, which has risen politically in I think a lot of countries...
...Thanks indeed, Peter, that's very honest, but in fact, it's common knowledge that when the shit hits the fan, "gold might become more attractive even in Europe". Let's hope Austria has a fair share of its gold repatriated in due time.
If we see continued easing in Europe however, what impact do you feel that would have on gold?
It depends, if uncertainty increases in parallel, for whatever reason, for example reasons which are situated in Asia in the Chinese situation, then perhaps gold might become more attractive even in Europe. On the other hand if Europe, as it's the view form the US for example, at the moment if Europe can improve its economic situation as planned in our forecast, then this might not have a big impact on the situation of the gold market.
Peter, thank you so much for your thoughts today.