WSJ’s John Carney has a report out on a very important story. The plan of the Germans to audit and physically inspect all their gold.
A German federal court has said that country’s central bank should conduct annual audits and physically inspect its gold reserves worldwide, including gold in the custody of the Federal Reserve Bank of New York. In addition to the FRBNY, Bundesbank gold is stored in London, Paris and Frankfurt.
For decades, the Bundesbank has relied on written confirmation of its gold holdings in London, Paris and New York. According to the report from the German audit court, the last time Bundesbank officials physically inspected the central banks gold holdings was, well, never.
This is big.
There has long been speculation that the New York Fed does not have anywhere near the gold in its vaults that it claims to hold for various countries. If other countries follow in Germany’s path and demand accounting of their gold, with physical inspection, this could cause a major problem for the Fed, if it does not hold the gold reserves it claims to hold.
A stalling by the Fed of foreign audits would be a warning signal to foreign countries that the gold alleged to be on hand at the Fed may not be there. The wise foreign country treasurer, upon seeing delaying tactics, would surely consider pulling his country’s gold out at that time, in the hope that he won’t be stuck as the last man with a Fed receipt with no gold to back it.
[I]f the gold isn’t there, well, calamity could follow as trust in the central bank gold depositories evaporated instantly.
But there is a question to be raised as to how thorough of an audit will actually be able to be conducted given the sloppy methods the Fed uses in recording actual gold ownership . Carney writes:
In any event, it looks like Bundesbank officials will soon be visiting the Fed’s vault, which is located 80 feet below street level and 50 feet below sea level. The vault is accessible only by elevators controlled by an operator in a remote location. I’ve been told by a source that the elevator operator is actually not in New York City at all, although I can’t confirm this and the Fed won’t discuss this sort of thing.
Down in the vault there are 122 compartments assigned to depositing countries and international organizations. Smaller gold depositing countries get shelves in shared library compartments.
The compartments do not have labels reading “Germany’s gold” and so on. They are instead numbered, and only a few people at the Fed know what numbers correspond to which country. The Fed says it does this to protect the privacy of the depositors. But this also makes actual inspection less reliable. There’s no way for Germany to know that the gold it is being shown is Germany’s, as opposed to some other depositor’s. In an extreme case—which I have no reason to believe is true—miscreants at the Fed could just show everyone who came to visit the same pile of gold.
But there is a long-term workaround to the US sloppy recording methods. The German auditorscould audit the gold and also mark the bars, say with “Property of the the Federal Republic of Germany” and a serial number for each bar. It is after all their gold!
This would make it much more difficult for the Fed to show this to other countries as gold belonging to them, instead of Germany. Especially, if auditors show up with short notice (as auditors are supposed to do!) and if this gold auditing catches on–as it should.
And speaking of gold audits. What about US gold held by the Treasury? I have long believed that an “Audit the Gold” campaign would be much more important than the “Audit the Fed” push.
Curiously, the gold of the United States of America has never been audited. And that leads to all kinds of speculation.Carney explains:
The gold of the United States government, which officials say is held in the United States Bullion Depository in Fort Knox, has been rumored—probably since the Depository’s founding in 1937—to have been looted and replaced with gold-painted tungsten, for instance. The government treats this as nonsense—which it most likely is—but nonetheless it does conduct regularly scheduled audits of the gold in Fort Knox, including doing purity tests on a small sample of the gold.
If Senator Rand Paul wanted to take a step toward getting back in the good graces of libertarians, his promoting an Audit the Gold bill in Congress would be an excellent step.
Reprinted with permission from Economic Policy Journal.