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Is Your Gold Safe from the Government?

Your Gold is Safe With Us

Written by Geoffrey Pike
Posted June 27, 2014

A couple of years ago, an initiative was started to get the German government and its central bank to repatriate its gold reserves.

Germany stored much of its gold in New York following World War II, due in large part to the Cold War and the Soviet presence in East Germany. It was supposed to provide safety and diversification.

Obviously, there is no longer a Soviet Union or an East Germany. However, there may still be a threat to the gold that Germany holds. Is it really safe in the United States?

After increasing pressure to obtain physical possession of its gold, the Bundesbank (the German central bank) relented and requested that much of its gold be returned from the New York Fed in early 2013.

The latest news is that German officials have decided after all that the gold is safe with the Americans, and they will leave it there.

Ironically, it was critics of the euro and the European Union who played a key role in making this an issue. Some people said it was important to get back the gold so the U.S. government could not use it to blackmail Germany.

There is irony in the fact that it is not a stretch to think that maybe the Bundesbank has backed off due to subtle or not-so-subtle threats from the U.S. government. Did German officials just wake up one morning and decide it wasn’t worth the trouble to get back the country’s gold?

Auditing the Fed and the Fed’s Gold

Ever since 2007, when Ron Paul burst on to the national scene, the Fed has become more of a topic of interest to the general population, even if it is still a minority. One issue that many Paul supporters and Tea Party members have championed is a full audit of the Federal Reserve.

I warn people to be careful what they wish for. If the Fed were actually audited and its true history were revealed, I would be afraid Congress might take over the role as central banker. That might be the worst scenario possible.

As bad as the Fed is, I think having Congress control monetary policy would be an even bigger disaster.

Of course, no audit of the Fed is coming. The politicians and central bankers will do almost everything in their power to prevent it. They will lie and break laws even more than they do now in order to prevent any sunshine on the Fed’s actions.

An audit of the United States’ gold holdings is even more remote. The fact that the Fed will not allow outside auditors to do a full inventory of the gold should tell us something is not right.

Supposedly, German officials with the Bundesbank sent a delegation to the Fed’s vault in 2012 to check on its gold. But this was just a spot check and not a full inventory.

Even if these were honest and independent people (which is in doubt), it still is no assurance to the Germans that the gold is safe and secure in New York.

If you worked at the New York Fed and had visitors coming to see your gold stash, you could put the correct number of gold bars in a locked vault and hang a sign over the vault that says “Germany’s Gold.” The visitors would come, see the gold, and leave.

Then maybe another country, let’s say Italy, will want to make sure its gold is safe and sound in the New York vaults as well. They pay a visit. The workers at the New York vault go back to that same room, remove some gold bars to match the Italian holdings, and replace the sign that says “Germany’s Gold” with a sign that says “Italy’s Gold.”

Do you see the problem here? The bars aren’t specifically marked with the owner’s name.

Unless there is a full audit of the Fed’s gold holdings, it does absolutely no good. Unless there is a group of truly independent people who go in there and are able to count all of the gold, including the gold that is supposedly held for other countries, then we can’t really know what’s there.

Unfortunately, in today’s financial world, we have to worry about another problem. Even if all of the gold is there, how do we know what promises the Fed has made to others? How do we know that it hasn’t promised to pay others, using the gold as collateral?

There are all sorts of problems that could arise with leasing gold or making other financial arrangements with it.

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What About Your Gold?

With this latest announcement from Germany that it will not try to reclaim its gold, what does that mean for the small investor of gold? What are the effects on the gold price?

I know that whenever there is a big drop in the price of gold, a lot of gold investors will call foul and make accusations of manipulation. This was particularly the case in 2013.

There may or may not be manipulation that causes the gold price to go down. You could say the same when the gold price is going up, which it did for 12 straight years.

Sometimes it is just a matter of buyers and sellers, what’s hot and what’s not. The price is just a reflection of where the buyers and sellers meet.

But let’s say there has been manipulation in the gold market by central banks, and the Fed in particular. Let’s say it has leased gold, or even sold all of its gold. Let’s say the vault is essentially empty.

If that is the case, then it is even more reason to buy gold right now. It means the Fed can’t do a lot more to drive the price down. If it has already sold all of its gold, then it should have nothing left to sell. I suppose it could sell promises to others, but even here there is a limit.

As much manipulation as there is with the Fed in distorting interest rates and misallocating resources and sending false price signals, the voluntary marketplace has a way of correcting things over time.

If the Fed has secretly sold all of the gold reserves, then the damage is done. If it ever comes to light, the gold price will likely go up.

If you are a gold investor, you should not worry about speculation that the Fed vaults are empty or at least not as full as they should be. In fact, you are in a fine position because you don’t have your gold stored at the Fed. You can sit back and enjoy the show.

But some Germans won’t be enjoying the show. They did a seemingly smart thing decades ago by keeping their gold out of the reach of the communists in the Soviet Union. Unfortunately for them, they may have underestimated U.S. politicians and central bankers.

And if you can’t trust U.S. politicians and central bankers with your gold, should you really trust them with your money when you buy government debt? Germany may have $140 billion at risk with its gold, but Japan and China have over $1 trillion at risk in U.S. Treasury bonds.

Japanese and Chinese officials should take note. It is not just the gold that is at risk — it is anything at all being handled by the Fed.

Until next time,

Geoffrey Pike for Wealth Daily

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