Gold move shows Buba can cave in to pressure

Germany’s central bank will repatriate some of its gold reserves. That could mean that the institution famous for its indifference to outside criticism does listen to the wider world at times. It would be nice if it showed the same humility on more important matters as well.

Sometimes even central banks need to play populist. The Bundesbank’s decision to physically repatriate big chunks of its gold reserves from Paris and New York to Frankfurt is a case in point. The central bank, famous for its indifference to outside criticism, has finally caved in to an idiotic debate in German public opinion.

For historical reasons, the majority of Germany’s gold is stored on foreign soil. In recent years, conspiracy theories have flourished. Self-proclaimed experts have raised the idea that the gold officially stored in New York, London and Paris might in fact have been sold by malign foreign powers.

The central bank’s inventory documents were deemed worthless: they can easily be forged, can’t they? And the physical bullion shown to visitors just had to be hollow, and filled with tungsten. Last year, even the Federal Audit Office fuelled the paranoia by criticising the Bundesbank for not checking whether its gold was really genuine.

All of this is absurd, and the Bundesbank itself has rightly pointed this out to the German public in the past. Now it has announced that it will bring home 674 tonnes of gold from New York and Paris.

The move is nothing but irrational. The trustworthiness of the Federal Reserve, Bank of England and the Banque de France is beyond any doubt. And moving around so much tonnage of physical wealth is anything but trivial. It will be a logistical nightmare that will cost millions of euros in shipping costs, insurance fees and security expenses. The German central bank nevertheless hopes that it will not only stifle doubts about the existence of its gold reserves but also strengthen the public’s trust in the currency.

The big gold move contains a broader message. It may be reassuring that even the most stubborn institutions do sometimes listen, and occasionally change course. The Bundesbank has played what it may think is a nice domestic political card. But it would be better if it displayed this ability to listen more often, and on more important matters. The European Central Bank’s bond-purchasing programme – a source of much Buba contempt – comes to mind. Here as well, Germany’s central bank would be well-advised to listen and change.

(This article was initially  published as a Reuters Breakingviews comment on 16  January 2013.)

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