Germany, Gold & ‘Diplomacy’,

by Ned Naylor-Leyland, TF Metals Report

Our pal, Ned Naylor-Leyland, starts the year off with a bang with this terrific essay.

Thanks, Ned, for sharing this with us!


Germany, Gold & ‘Diplomacy’,

by Ned Naylor-Leyland

In 2012 the ‘German Gold’ story started to gather momentum. Early that year, Deutsche Bank purchased (in joint venture with G4S) a large site on the outskirts of London, with the intention of building an LBMA-friendly Gold vaulting operation. Deutsche/G4S embarked on a 2-year construction program at the site to build a state of the art warehousing facility. This job was completed when the site went operational in June of 2014.

Just 5 months after completion, on Christmas Eve 2014, Deutsche Bank said (on a slow news day) that their London vaulting facility is now ‘up for sale’. In light of Deutsche Bank’s departure from the London Gold ‘Fixing’ process, and its departure from ‘all physical Precious Metals business’ in 2014, maybe this mooted vault sale isn’t such a surprise.

There is, however, rich and fascinating context to the story of Deutsche Bank, Germany and Gold Custody.

Let’s rewind a little…

Back in November of 2012 Andreas Dobret, executive board member of the Deutsche Bundesbank, said the following in an open speech to the New York Federal Reserve Chairman Bill Dudley:

“Please let me also comment on the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany – a discussion which is driven by irrational fears. In this context, I wish to warn against voluntarily adding fuel to the general sense of uncertainty among the German public in times like these by conducting a ‘phantom debate’ on the safety of our gold reserves. The arguments raised are not really convincing. And I am glad that this is common sense for most Germans. Following the statement by the President of the Federal Court of Auditors in Germany, the discussion is now likely to come to an end – and it should do so before it causes harm to the excellent relationship between the Bundesbank and the US Fed.”

Two short months after Mr Dobret’s speech, in January 2013, the Bundesbank did a monumental U-Turn, asking to repatriate 300 tonnes of Gold from the same institution to which it had so publicly declared its faith. So far, it is reported that they have successfully repatriated just 5 of those 300 tonnes in 2 years.

The latest data shows that more Gold has been departing the New York Fed in late 2014, alongside a successful Dutch Central Bank repatriation. If this additional Bullion is found not to have headed to Frankfurt, then there appears to be a monumental ‘diplomatic’ problem. I say ‘diplomatic’, because in November 2014 Deutsche Bank itself stated in a research note that:

“In the beginning of 2013, the Bundesbank announced it would repatriate 300 tonnes of gold stored in the US by 2020. It is well behind schedule, citing logistical difficulties.

Yet diplomatic difficulties are more likely to be the chief cause of the delay, especially seeing as the Bundesbank has proven its capacity to organise large-scale gold transports.”

That the Dutch have successfully repatriated 122 tonnes (for context this is 122 of the 166 that left the FRBNY in 2014), from the same black-hole vaults in which the German Gold is apparently stuck, adds a fascinating new twist to the issues of 21st century ‘Diplomacy’ and sovereign Gold reserves.

Once the initial German repatriation request had been placed, in early 2013, many other ‘interesting’ things started to happen in the world of German Gold. Most crucially, the German Financial Regulator (BAFIN) suddenly became a lot more interested in the subject of Precious Metals. Indeed, in 2013 BAFIN paid several visits to Deutsche Bank, interviewing and demanding documents as part of an investigation into the potential manipulation of Precious Metals markets.

Further to this investigation, and after considering Deutsche Bank’s Precious Metals ‘operations’ in some detail, Elka Koenig of BAFIN stated, in January 2014 that:

The allegations about (manipulation of) Precious Metals markets are “particularly serious because such reference values are based — unlike Libor and Euribor — typically on transactions in liquid markets and not on estimates of the banks.”

This pointed comment by BAFIN followed on from the imposition of new IOSCO legal principles governing global benchmarks and preceded the total departure of Deutsche Bank from what BAFIN was inferring could be a major financial crime scene. As an interesting aside, it is said by people close to the IOSCO process that the ‘London Gold & Silver Fix’ failed 15 of 19 principles of fair and transparent global benchmarking.

Immediately after this important statement by Elka Koenig from BAFIN, Deutsche Bank announced that it was:

“withdrawing its participation in the gold and silver benchmark setting process following the significant scaling back of our commodities business. We remain fully committed to our Precious Metals business” .

That’s all well and good, however Deutsche Bank manifestly were not, as they put it, ‘committed to their Precious Metals business’. Deutsche Bank’s Head of Precious Metals, Matthew Keen, resigned the next working day following Elka Koenig’s statement about potential manipulation. Indeed, his replacement in that role, Kevin Rodgers, also resigned just three short months later.

Between twice losing the top man in their Precious Metals business, Deutsche Bank also unsuccessfully sought buyers for its London Fix seats (both Gold & Silver), quit as an LBMA forward market maker and quietly stopped contributing data to GOFO calculations. For those who are willing to see, it is fairly self-evident that a serious conversation took place between the Bundesbank and Deutsche Bank about what the Regulator had learned about Precious Metals price discovery and custodial ‘issues’, leading to Deutsche’s wholesale departure from the industry.

The recent spate of European Central Bank Gold repatriation requests, Degussa’s revelation in December that they have seen ‘record demand’ for physical Gold in Germany, and the ongoing ‘diplomatic issues’ with Russia add yet more intrigue to an already bizarre story.

The Germans purportedly moved their Gold to London and New York during the Cold War to keep them safe from the reach of the Soviet Union. Now the Bundesbank appear to want the Gold back (much closer to Russia), just as NATO and Western powers sabre-rattle against Germany’s old foe. You couldn’t make it up.

One might say, on the balance of evidence, that the Germans are now more worried about their ‘ongoing diplomatic relations’ with the US (NSA spying etc) and the opaque LBMA Precious Metals ‘price discovery’ and custodial system, than they are by anything Putin might be up to.

It seems certain that the story of Germany & Gold will be something to watch once more in 2015, not least initially to find out if those paltry repatriation numbers from the New York Fed are in due course updated to Germany’s benefit.

Ned Naylor-Leyland, January 2015 (thanks to R. Manly)

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