The logistical exercise of shipping 86 tonnes of gold across the Atlantic raises eyebrows under any circumstances. The reasons for moving the gold from Fort Knox were never made clear, and many regard the supposed transatlantic divorce with some scepticism. But the choice of London as the ‘temporary’ home of the gold is peculiar. True, it is closer to the Netherlands but it is also under foreign jurisdiction, something at odds with the avowed objective of escaping the clutches of foreign custody.
Unless the Dutch believe they will actually get to use some of that gold they have just moved (for operational reasons - in case of some emergency), sending their gold to a foreign jurisdiction does not make any sense.
It is impossible to validate the transaction because we don’t know whether there is anything wrong with the gold they have shipped out of Fort Knox. As for the issue of whether gold reserves can be legally owned, apart from being safely guarded intact, it would be interesting to see how far seizure could go?
Sebastien Tillett, an economist at Oxford Economics, cautions that seizure of central bank’s gold reserves isn’t likely to occur. European central banks have little reason to worry about outright seizure, and the risk is extremely remote, Tillett told Fork in the Road. However, their assets could become temporarily inaccessible under extreme sanctions, legal, or geopolitical circumstances. But temporarily would do a lot of heroic work in such a scenario. A reserve would potentially be in exactly those circumstances when waiting is expensive. Certainly, gold would be available at some point, but when you need it immediately, being broadly legally entitled and practically free to do so isn’t much of an answer.
Finally, a few contextualizing facts about the shipment to help evaluate the motor behind this massive transfer of gold. Some have speculated, for example, that Washington is making a secret preparation to seize or lay claim to European bullion. Alternatively, some have argued that the shipping of gold to the US is a sign of growing Dutch confidence in Washington. If anything, the example of the Dutch central bank is a case of a central bank adopting a new crazy habit – making decisions to store its gold in a foreign jurisdiction, in an obvious sign that it has taken leave of its senses. Geopolitical unrest is, at this point, a euphemism for the possibility of lunacy taking us all over the edge into catastrophe. At the same time, the central bank has gone out of its way to downplay the significance of this particular movement of its gold, aside from the delays and complications. Furthermore, even the mention of geopolitical unrest was only to explain the move in the context of resilience, flexibility and crisis preparedness – exactly the nature of specific delays that the bank experienced in moving its physical gold were not given, but would be much less serious costs and complexity than the latter objectives.
The liquidity of the gold market is one reason why a European institution is moving its gold from across the Atlantic to London, argues Krishnan Gopaul of the World Gold Council. If at some time in the future it needs to be mobilised, then it’s easier to do so in London than anywhere else, he tells us. And holding it closer to home is another plus point. We’re not so sure that the health of the London bullion market is much of a reason, though.
No one threatened action against the postal service, so it seems rather unlikely that it has played a role in the decision by one European institution to reassess the usefulness of gold, at least in terms of the first factor. No, the moving of gold presumably has more to do with where it is physically stored than with how much gold there is. But given the manner of the transaction, and the relentless succession of financial crises, perhaps this is one of those areas where just guesswork gives some advantage in front of the queue. If and when central banks decide to move their gold around again, this transaction strongly suggests that exposure will be one of the considerations (along with liquidity and geographic considerations, and possibly proximity). While it doesn’t affect market liquidity – 86 tonnes of gold is hardly the size of an attractive transaction for profitable trading – exposure seems to rank up there with attraction in an already liquid market. Ultimately, however, the priority condition is for access.
It is arguably only a mixture of circumstances that gives the former character. The aspects of foreign policy which can be inferred from his signals up to now, the willingness to adopt a posture of hostility to the European Union, are all clearly lined up. Buying Greenland has only exceeded boundaries of the friendly approach to Germany’s and Italy’s gold, which some politicians in these countries have openly called for. A conspiracy theory is not required either, it should rest assured that Europeans can be made serious on this issue without help from the Americans.
You have to love the paradox of encouraging and then looking askance at Europe’s exploration of its options in exposure to this government’s troublesome-ness, yet invoking gold as an explicit sign to sit up and pay attention. Surely, nobody could actually think that gold is beyond American jurisdiction, and that it would be possible to ship a ton of the stuff without drawing the attention of the black helicopters? If there were such naïveté, it would surely disqualify its bearer from ever being entrusted with any grandmaster plan. Yet if moving gold features so prominently in the discussions of their anxiety, it must be because they consider it one of those options. In which case, even the very improbable event that Washington would sit up and pay attention, properly belongs to the European institutions that hold it, whichever way they choose to store it. As a reserve manager-style backup plan to a grandmaster plan that’s not all that well thought out, price of gold sounds a whole lot easier to use than any other option, but has the added disadvantage of being even more muddled.
The focus on an alleged removal in protest against Washington is a well-admitted distraction. The official word from Governor François Villeroy de Galhau is that there are unpolitical reasons for France removing its New York gold. One could always go looking for evidence of something that did not actually happen, and riskier approach than looking for evidence that undercuts the questionable assurance by Bundesbank that the New York Fed is a reliable custodian. The fact is most evidence implies Bundesbank is in need of bringing some gold home.
Had the article focused on a Bundesbank return instead, it’s almost certain cover both moves instead of just the French return, with both assessments discrediting the loss of confidence in the custodian itself rather than it being a simple difference of jurisdiction where it happens to be.
The explanation for that discrepancy is simple. This is how professionals view the minutiae and make the complex calls. For someone who like grooming the horse after the fact, however, the relative trust in the New York’s role might actually have mattered.
Two things are irrefutably true about gold storage: It’s safe, and you have access to it under unusual circumstances.
Not every Australian is fortunate enough to have access to a facility for custody of gold as excellent as the one detailed in the story linked above. But that doesn’t diminish the merits of such a thing.
When the Dutch insist on slightly more access to their gold stored in London, it’s fair to wonder if the story might contain interesting reasons.
Conversely, anyone who wants to keep and use gold stored under another jurisdiction is every bit as entitled to reason about the balance of all sorts of factors. They might do so out of a desire to somehow retain some dependence on foreign facilities. Or they might simply have a practical ambition to move the gold to another jurisdiction to keep it around, should the markets of supply and demand be disturbed under the present one. In that case it’s irrelevant which jurisdiction is selected.
The amount of diversification in exposure to different jurisdictions is another good reason for what the Dutch are doing. If the gilded of America think that their government won’t misbehave at some point with their ability to use the gold they have stored under its jurisdiction, that assumption on their part might be dangerous. It could be far too late to decide otherwise if they later find that some other government will.
The political consequences are now up to Washington, which can dress the whole thing up as showing concern for its own security, or make whoever thinks otherwise look silly — call it a sleight of hand if you like, even if there is a closet you will never need to read again. The relation of the dutch relocating some of its bullion to the future of the dollar is as clear as the fate of the treasury markets. It is a revision to the geography of one reserve holder’s preparedness, concrete enough to warrant attention, and yet at the same time so little of an american financial power’s public obituary that the dutch will rely on another place for the next emergency, with the expectations that those who benefit from its decision will be capable of mobilizing the gold they have as readily.
This must be a follow up to the previous note about access arrangements, but some more clarity on how quickly reserves can be mobilized or what might possibly prevent it would be of interest to the good folk taking the supplied account of where it has gone.
References:
Arthur Sullivan, Fork in the Road, analysis of European gold custody and the Dutch transfer