The BaFin Enquiry Into Deutsche Bank

According to Reuters, Deutsche Bank has decided to quit as a member of the gold and silver fixing committees in the London bullion markets. This news comes after Deutsche Bank was instructed in mid-December by BaFin, Germany’s bank regulator, to hand over documents in connection with its inquiry into suspected manipulation of gold and silver prices.

The fact that Deutsche Bank is pulling out of the prestigious fixing role four weeks after BaFin requested these documents suggests Deutsche Bank has a case to answer, even though it has been sold to us through the press as part of their overall scaling-back from commodities. Furthermore the nature of market manipulations is that they usually involve a number of banks, as the scandal over Libor illustrates. So it is perfectly reasonable to suspect that other banks in the two fixing companies are likely to be involved as well.

This should come as little surprise to close followers of bullion markets.  The surprise perhaps is that the manipulation of gold prices is being seriously pursued by a G7 government regulator, when we all assumed the subject is off-limits, given the close relationships between bullion banks and central banks. However, inter-governmental relationships between the US and other governments, particularly Germany’s, have come under considerable strain recently.

To put this in context requires a brief summary of recent and relevant history. From 1952 the Bundesbank began to redeem some of its trade surplus dollars into gold bullion stored with the New York Fed, adding to their stock there every year until 1968, when it appears some of their holding was shipped or swapped to other centres. From 1969 onwards there were relatively minor changes in the amount of gold stored with the New York Fed and according to the Bundesbank’s records in 2012 it amounted to exactly 49,396,880.287 ounces (1,536.4 tonnes). There is no known record of this gold being leased.

The Bundesbank never fully embraced the anti-gold stance of other central banks, which is understandable given Germany’s painful experience of currency destruction and the development of her strong post-war savings culture. The Bank was always careful, in the absence of gold convertibility, to pursue sound monetary policies. This perhaps makes the ownership of her gold more sensitive for the Bundesbank than for most other Western central banks. Furthermore, after the creation of the ECB she has been demoted from being one of the top four central banks with a strong policy influence at the Bank for International Settlements, to little more than a regional hub with some out-dated sound-money ideas. So when growing public pressure in 2012 forced her to eventually seek repatriation of her gold it is hardly surprising her priority would be to respond to domestic German opinion rather than the gold policies of Anglo-Saxon central banks with which she has little direct involvement.

Only then did it transpire that Germany’s gold at the New York Fed probably didn’t exist. Bundesbank officials had even been refused sight of their own gold according to Der Spiegel, a point picked up by a previously secret report by the German Federal Audit Office. It is hard to justify why an official from the Bundesbank should be refused sight of his own bank’s gold. Instead the Bundesbank was forced to rely on written affirmations by the New York Fed that their gold was safely there.

The public furore over the Fed’s behaviour forced Bundesbank officials on the back foot, and while publicly defending the integrity of the New York Fed, they sought repatriation of at least some of their 1,536.4 tonnes of gold. In the event the Bundesbank announced it would only look for 300 tonnes from New York before 2020. It appears that this is all the Fed would agree to deliver, small change that could be picked up in the market over the agreed time.

According to the Bundesbank, in 2013 only 37 tonnes had been delivered, less than 2.5% of Germany’s gold held at the Fed and less pro rata than the annual equivalent amount the Fed is expected to repatriate. Worse still is the news this weekend in Die Welt that only five tonnes of this has actually come from the New York Fed, the rest from Paris, so this figure represents the total repatriated from both centres.

Parallel to the Fed’s apparent treatment of Germany’s gold, whistle-blower Edward Snowden revealed that America’s National Security Agency routinely taps Angela Merkel’s and other German politicians’ telephone conversations, news that created uproar in Berlin.

BaFin is enquiring into gold market rigging against this politically-charged background. Furthermore, BaFin is independent of the Bundesbank, unlike the Financial Conduct Authority in London which is a division of the Bank of England. So even if the problem hadn’t been muddied by the events described above, it might have been difficult enough to persuade BaFin through central bank channels to drop its enquiries: instead there is a growing level of expectation in Germany that the regulator will not be pushed around by foreign, particularly American interests. If BaFin does back off, this will almost certainly be interpreted by the German public and politicians that it has only done so under pressure. If BaFin does not back off, then the Bank of England will probably be forced to cooperate with BaFin.

Whichever way BaFin proceeds, opaque bullion markets including leasing activities by central banks look likely to become a public issue, in Germany if not elsewhere. This being the case, it is very likely that the Bundesbank will want to distance itself from all leasing activities in London for fear of being accused of not looking after the nation’s gold responsibly.

Timing for a schism between central banks over gold could hardly be worse for them. Evidence has been accumulating at an accelerating pace in 2013 of the large scale of leasing transactions by Western central banks, potentially leaving them with very little monetary gold in their vaults. Asian buyers have turned an estimated eighty per cent of this gold into jewellery, and it cannot be returned. Indeed, the circumstantial evidence suggests that with or without the Bundesbank’s knowledge, this may have been the fate of Germany’s gold.

It is a problem that should be closely followed, given the potential implications for bullion prices, the bullion banks short of physical metal, unbacked derivative markets, and ultimately for the stability of fiat currencies as well.

Alasdair Macleod

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