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Why Germany wants its gold back Add to ...

These are stories Report on Business is following Wednesday, Jan. 16, 2013.

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Germany to repatriate gold
Germany’s central bank has decided it wants at least some of its massive gold holdings held inside its borders.

The Bundesbank today announced plans to repatriate almost 700 tonnes of gold now held by other central banks in New York and Paris by 2020.

“With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time,” the central bank said in a statement as it outlined plans to pull 300 tonnes from the Federal Reserve in New York and 374 tonnes from the Bank of France in Paris.

The bullion will be held in the Bundesbank’s own vaults in Frankfurt.

“The withdrawal of the reserves from the storage location in Paris reflects the change in the framework conditions since the introduction of the euro,” said the central bank.

“Given that France, like Germany, also has the euro as its national currency, the Bundesbank is no longer dependent on Paris as a financial centre in which to exchange gold for an international reserve currency should the need arise. As capacity has now become available in the Bundesbank’s own vaults in Germany, the gold stocks can now be relocated from Paris to Frankfurt.”

This actually dates back to the days of the Cold War, amid fears West Germany could be invaded by the Soviet Union, putting its gold reserves at risk.

Last year, however, Germany’s independent auditing agency, the Federal Court of Auditors, sparked something of a political controversy when it urged the Bundesbank to more closely monitor the gold held by other central banks.

Some observers see the move as something of a slap in the face to the Bundesbank’s counterparts in the United States and France, but Carl-Ludwig Thiele of the Bundesbank board said there won’t be diplomatic issues.

He added that markets shouldn’t interpret the move as a sign of the central bank expecting a second financial crisis.

"The gold serves the purpose of being flexible in case of a crisis,” he told reporters.

At the end of last year, the Bundesbank held almost 3,400 tonnes of gold, valued at €132.8-billion, or more than $175-billion (U.S.), at the time.

With more than 270,000 bars, more than 1,000 tonnes are in Frankfurt, more than 1,500 tonnes in New York, 450 tonnes in London, and the 370 tonnes in France.

The Bundesbank’s move is significant in that repatriating bullion can push up prices amid the move to physical gold.

The Montreal-based Centre for Research on Globalization also questioned whether whether the Bundeskbank's move could spark other countries to follow suit.

"Most importantly, the action of repatriation signifies the acknowledgement of credit risk and the Bund's concern of any possibility that gold held at the Fed may be over pledged in some manner," added Anthem Blanchard, chief executive officer of Blanchard Vault.

"Given that the Fed's balance sheet is about to cross $3-trillion coupled with the fact that the Federal Reserve has its own set of accounting standard, which can be changed with little notice to any non-Fed holders of assets, the Bundesbank's concerns are somewhat understandable," he added in an e-mail.

What drives the loonie
As currency tensions mount across the globe today, a new report looks at what’s driving the strength of the Canadian dollar, and how it may have moved from a “petro-currency” to the “Bay St. Buck.”

The report by Philip Cross for the Macdonald-Laurier Institute comes as the loonie, the nickname for Canada’s dollar, continues to run above parity with the U.S. currency and is projected to hold at that level, give or take a few cents, at least through the end of next year.

It also comes amid talk of a “currency war” as the strength of some currencies threaten the exports of their countries. The strong dollar has been a concern in Canada, among both policy makers and the country’s exporters.

The loonie has oft been referred to as a petro-currency because of Canada’s resource-fuelled economy. It traditionally moves in tandem with oil prices because, noted senior currency strategist Camilla Sutton of Bank of Nova Scotia, both are sensitive to the same drivers, such as global economic growth and the fortunes of the U.S. dollar.

She agreed the long-standing correlation has broken down temporarily.

The study on so-called Dutch Disease by Mr. Cross, released by the think tank this morning, notes how Canadian oil prices lag those of world benchmarks, but how the dollar has been propped up by foreign money flooding into the country by the hundreds of billions.

Many observers have noted this development, driven by Canada’s economic outlook, the strength of its banks and the fact that it remains one of the few countries to still boast a triple-A credit rating.

Since the early days of the financial crisis in 2007, says Mr. Cross, formerly Statistics Canada’s head economic analyst, foreign investors have gobbled up almost $275-billion in Canadian bonds. Compare that to a decline of $66- billion in the five years since the loonie began climbing after 2002.

“Foreign interest has been confined to the safe haven of bonds, as foreign direct investment and investment in stocks were unchanged over the same period,” he said.

“The conclusion is that the recent strength of the exchange rate no longer can be attributed solely to commodity prices, and therefore resource prices cannot be singled out as the source of problems in Canada’s manufacturing sector,” he added.

“Instead of a ‘petro-currency,’ we may now have the ‘Bay St. Buck.’”

As the report was being released today, Russia was citing its concerns over a currency war.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, the first deputy chairman of Russia’s central bank, told a conference in Moscow, according to Bloomberg News.

His comments, in turn, followed comments late yesterday by Jean-Claude Juncker, Luxembourg’s prime minister and the chief of the group of finance ministers of the euro zone. He warned that the euro is now “dangerously high.”

However, that was softened somewhat as an official of the European Central Bank said the euro’s strength was not a major trouble spot.

“It appears that European policy makers have woken up to the fact that the recent rebound in the euro may be doing more harm than good after outgoing eurogroup chief and Luxembourg Prime Minister Juncker stated that the single currency was reaching ‘dangerously high’ levels,” said senior analyst Michael Hewson of CMC Markets in London.

“Unfortunately this appears to be the price for the recent decline in Spanish and Italian bond yields, which have been highly correlated with the euro as pressure on the ability of the Spanish and Italian governments to sell their bonds has subsided,” Mr. Hewson said in a research note.

“If yields continue to fall then we could well see further euro gains towards $1.40 which would ratchet up the problems once again in the weaker economies as they struggle to rebalance.”

Bank profits soar
Major U.S. banks are reporting surging profits today. But, unfortunately for Jamie Dimon, there won’t be a whale of a bonus.

JPMorgan Chase & Co. cut Mr. Dimon’s compensation in the wake of the $6-billion (U.S.) trading loss last year by the “London Whale,” the nickname for the trader involved.

Don’t cry for JPMorgan’s chief executive. True, his bonus is being cut by half, but he’s still getting a $10-million bonus and $1.5-million in salary.

This came as the banking posted a hefty gain in profit to $5.7-billion or $1.29 a share in the fourth quarter.

Goldman Sachs Group Inc. also posted a sharply higher profit, of $2.9-billion or $5.60 a share, as did Bank of New York Mellon Corp., whose profit jumped to $622-million or 53 cents.

Magna boosts forecast
Magna International Inc. says it’s making headway in efforts to expand beyond North America and Western Europe.

Canada’s largest auto-parts maker said on Wednesday it expects total sales in 2013 of between $31.3-billion (U.S.) and $32.7-billion, compared with a forecast made in November of $30.3-billion to $31.2-billion, The Globe and Mail's Bertrand Marotte reports.

“Our outlook reflects the progress we are making in expanding Magna’s business outside of our traditional markets. Our growing footprint in high growth markets, combined with our strong positions in North America and Europe, further enhances our ability to support our customers on global platforms,” Magna chief executive officer Don Walker said in a news release.

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