Germany — the country of beers, fast cars, sausages and Gold? Yes, the German government has the second biggest gold reserves in the world, behind the United States.
Half of this is kept in the vaults of the Bundesbank, the German Central Bank, in Frankfurt. The other half is divided between New York and London. But it was not always like this.
Until 2012, Germany had only 31% of its gold kept within its borders. Over a period of five years, in a secret operation, the country repatriated 674 tons, moving the gold from Paris and New York to Frankfurt. But, how did this happen?
Gold Repatriation
To understand why the Germans repatriated their gold, we need to go back in time. It was during the economic miracle of the 1950’s and 1960’s that Germany began stockpiling large amounts of the precious metal.
West German companies became export powerhouses during this time and were being paid in dollars. The central bank used this flow of the American currency to purchase gold.
Back then, under the so-called ”Bretton Woods System”, all currencies had fixed exchange rates based on the dollar. And the dollar value was tied to gold.
Most of the German gold bought during this time was kept in New York, mainly due to security reasons.
During the cold war, Frankfurt was only 100 kilometers away from the border of Soviet-controlled East Germany. The threat of invasion was taken very seriously, so keeping the gold abroad seemed to be the best option at that time.
Fast forward to 2013, when the German Central Bank announced that it would repatriate 300 tons of gold from the New York Federal Bank and all 374 tons that were stored in Paris.
The operation was expected to last until 2020. But by August 2017, the bank announced that the job was completed. The logistics of the operation was surrounded by secrets.
Officially, very little information was shared, but based on previous experiences and specialists, this is probably how it worked.
Let’s start with the 300 tons from New York. They were located at the high-security vaults of the Federal Reserve Bank, which is the world’s largest known depository of monetary gold. In 2019, the vault had approximately 497,000 gold bars, a total of 6,190 tons.
It is possible to keep all of that in one place without causing the building to collapse because the vault rests on a bedrock of Manhattan Island, 80 feet below street level.
To access the vault and reach the 300 tons of gold bars, the German Bundesbank officials had to go through the standard security procedure.
One can only enter the vaults with what the bank calls a ‘control group’, which is formed by two members of the Fed gold vault staff and one internal audit staff. The three people must be present every time something happens in the vaults.
To access the compartments, there’s only one entry, which is protected by a 90-ton nine-foot-tall steel cylinder that is set in a 140-ton steel and concrete frame. When the concrete frame is closed, it creates an airtight and watertight seal while its four steel rods are inserted into holes and time clocks are engaged, locking the vault until the next business day.
After passing all these security obstacles, the control group and the German representatives have access to the compartment where the gold is stored at. That’s when the officials were able to inspect and separate the portion that would be transferred, preparing for the second phase: The actual trip.
There are two options to transfer gold overseas: Via planes or ships. Sending gold on a ship would be much riskier and expensive, as it would take more time. So, planes are considered the best option.
For safety reasons, normally it’s an insurer’s requirement that a maximum of one tone of gold can be moved per flight. The German repatriation plan mirrored those requirements. Over the period of four years, a total of 300 flights moved one ton of gold each.
In New York, the federal bank building is about 32 kilometers away from the Lufthansa Cargo area of JFK Airport. An armored truck would most likely have been used. Once at the airport, the gold would be classified as a safe TD1 product by Lufthansa, which means it’s very valuable for insurance purposes.
From the armored truck to the plane, another security protocol is followed before the gold is finally ready for take-off to Frankfurt. The truck personnel does not see where the cargo goes, they just deliver. Part of the gold that was in New York did not go straight to Frankfurt though.
It was flown to Zurich, where the gold bullions were remodeled into bars that meet the London Good Delivery’s standards. This format has sloping edges and makes the bars easier to pick up than New York bars, which are shape like bricks, therefore easier to store.
From Zurich, the bars would be flown to Frankfurt, where officials checked its authenticity and purity as well as the weight. After this process, they were deposited in the gold vault of the Bundesbank. Mission completed!
The 100 tons of gold from Paris traveled a similar path. Again, ground transport would pose risks that are minimize through air travel. From the Banque de France to the Lufthansa cargo area at the Charles de Gaulle airport, is approximately 26 kilometers.
This would also be done on armored trucks. From there, one single flight to Frankfurt, where the gold would travel to the Bundesbank vault and be stored. At the end of the operation, Germany repatriated 674 tons of its gold reserves. New York still holds more than a third of the total and London 432 tons.
The repatriation cost the German government 6.9 million euros. But why would a country spend this much money on such a risky operation?
According to German media, the decision to bring the gold back has nothing to do with economic factors, but one thing only: Symbolism. Or as the Bundesbank puts it: To build trust and confidence domestically. And the Germans were not the only ones to repatriate gold in the last decade.
The Netherlands undertook a similar move in 2014. In 2018, Hungary announced it would bring its 3 tons of gold from London. Poland also moved its reserves in 2019. At the same time, countries like China, Russia, Kazakhstan and Turkey also bought huge amounts of gold, mainly to avoid exposure to the dollar, but that’s a whole different story.
Many moves can also bring many problems. In 2018 for example, crisis-hit Venezuela wanted to bring back its gold from London. But the Bank of London, where Venezuela had what is believed to be 31 tons of gold, simply refused to repatriate. The reason was that Nicolas Maduro wasn’t recognized as the legitimate leader after his disputed 2018 re-election.
Facing sanctions from western countries, the Venezuelan government also had difficulties selling its gold. So much so that in 2019 there were reports that Maduro, in a move to avoid the sanctions and with the help of the Russians, flew 7.4 tons of gold, the equivalent of over $300 million dollars at that time, to a refinery in Uganda, and afterwards were sent to Abu Dhabi, where it is believed to be sold.
With this tactical move, the Venezuelan government avoided international sanctions and still probably profited from the operation. But aside from Venezuela, where the intention to repatriate gold is mainly to save an economy on the brink of collapse, what are the other countries motivation for these dangerous high efforts projects?
Adam Glapinski, President of the National Bank of Poland, justified the action in saying that ”gold symbolizes the strength of a country.” Well, he is not wrong. In general, gold is seen as a safe heaven investment. That’s why often during or right after a period of crisis, there is a gold rush in the world.
The last time that happened was in 2020 when it became clear that Coronavirus pandemic would have long-lasting effects on economies. The fear that other traditionally profitable investments like stocks, bonds, or real estate might lose value pushed people to the precious metal.
In August 2020, the ounce topped $2,000 dollars for the first time. And as it happened with counties that repatriate, investors that pivot to gold also face logistical challenges.
So what options are there for private investors to keep the shiny metal safe?
Once an investor buys gold bullion, there are only three options to secure it: Keep it at home, use a bank’s safe deposit box or pay for a third-party storage firm. Usually, banks are the go to solution. But the financial institutions normally do not insure contents of safe boxes, and buying separate insurance for precious metals is expensive and hard to get.
Besides that, there is the fact that banks are accessible only during business hours. If the price skyrockets in a day and the investor wants to benefit from this, it might be a challenge to access the gold quickly when a bank is in between.
Moreover, in the unlikely but still possible event of an economic meltdown, banks might close and the metals kept in safes would be trapped inside. Traumatic experiences from the past also play a role here.
In 1933, American President Franklin D. Roosevelt blamed the slow recovery post-1929 crash on the hoarding of gold and signed an executive order forbidding it within the United States. Penalties of $10,000 fine were imposed or ten years imprisonment, sometimes both.
People were allowed to own only the equivalent of $100 dollars in gold coins. Fear that history might repeat itself pushes gold owners to choose the option of private storage companies. Usually, they offer all kinds of extra services to safely store the precious metal.
A storage firm in London, for example, offers chauffeur, Rolls-Royce, and a security apparatus that includes fingerprint and iris scan. The safe-boxes are steel-lined and supposedly impenetrable. Those services don’t come cheap and an investor might actually have to spend a couple of the gold bars to pay for it.
Alternatively, people can always keep their gold at home. A very high risk option, as the chances that someone will have an adequate safe is small. Plus most insurance companies will probably not provide coverage in case the gold disappears.
The truth is, without a good safe and insurance, there is a high risk that the investment will turn into a nightmare.
