Gold: Main constituent of German foreign reserves. With good reason

News 12.06.2015

The Bundesbank (Federal Bank of Germany), responsible for the German currency reserves, utilizes – alongside currencies and loans to the International Monetary Fund – primarily gold to fulfill this task: with a share of 70 percent the precious metal dominates the German currency reserves, since gold represents an ideal diversification to other financial instruments, and has proven universal acceptance and robustness both in times of crisis and, especially, regarding currency risks.

Initially, building up the German gold reserves proved to be a rather modest affair. In late 1951, the Bank deutscher Länder – the predecessor of the Bundesbank – held no more than just 24.5 tonnes of gold as foreign reserves. But that would change rapidly: 1968 marked a peak when German gold holdings increased to nearly 4,034 tonnes. This development was caused by the Bretton Woods System – in force from 1944 to 1971 – an international monetary system comprising of foreign exchange spreads and the US dollar as the anchor currency, with the intent to combine the advantages of a flexible exchange rate regime with those of a fixed one. The Bretton Woods system also pegged the gold price to the US currency, which made it practice that countries with current-account surpluses accumulated gold holdings. Germany took advantage of this to balance its current-account surpluses both in the USD area and within the European Payments Union (EPU). During the German “Wirtschaftswunder” in the 1950s, 1,514 tonnes of gold were transferred to the Bundesbank from the EPU, and even 2,345 tonnes from the USD region.

After the end of Bretton Woods system, the German gold reserves leveled off at 3,700 tonnes and remained there for quite a while. With the introduction of the European Monetary System in 1979, 740 tonnes of gold were transferred to a common fund, but were transferred back to the Bundesbank in 1998. In 1999, 232 tonnes of the German gold reserves were transferred to the European Central Bank (ECB), and every year since 2001, 5 to 12 tonnes have been used to mint gold coins. At the end of 2014, the gold reserves of the Bundesbank amounted to 3,384 tonnes.

Arnulf Hinkel
Financial journalist

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