The Bernanke Shock
by Peter Schiff: The
Trillion Dollar Trick
world was shocked this month by a demand from Germany's Bundesbank
to repatriate a large portion of its gold reserves held abroad.
By 2020, Germany wants 50% of its total gold reserves back in Frankfurt
– including 300 tons from the Federal Reserve. The Bundesbank's
announcement comes just three months after the Fed refused to submit
to an audit of its holdings on Germany's behalf. One cannot help
but wonder if the refusal triggered the demand.
Germany appears to be waking up to a reality for which central banks
around the world have been preparing: the dollar is no longer the
world's safe-haven asset and the US government is no longer a trustworthy
banker for foreign nations. It looks like their fears are well-grounded,
given the Fed's seeming inability to return what is legally Germany's
gold in a timely manner. Germany is a developed and powerful nation
with the second largest gold reserves in the world. If they can't
rely on Washington to keep its promises, who can?
of Germany's repatriation on the dollar revolves around an unanswered
question: why will it take seven years to complete the transfer?
explanation is that the Fed has already rehypothecated all of its
gold holdings in the name of other countries. That is, the same
mound of bullion is earmarked as collateral for a host of different
lenders. Since the Fed depends on a fractional-reserve banking system
for its very existence, it would not come as a surprise that it
has become a fractional-reserve bank itself. If so, then perhaps
Germany politely asked for a seven-year timeline in order to allow
the Fed to save face, and to prevent other depositors from clamoring
for their own gold back – a 'run' on the Fed.
Now, the Fed
can always print more dollars and buy gold on the open market to
make up for any shortfall, but such a move could substantially increase
the price of gold. The last thing the Fed needs is another gold
price spike reminding the world of the dollar's decline.
None of these
theories are substantiated, but no matter how you slice it, Germany's
request for its gold does not bode well for the future of the dollar.
In fact, the Bundesbank's official statements are all you need to
confirm the Germans' waning faith in the US.
after the Bundesbank had requested an audit of its Fed holdings,
Executive Board Member Carl-Ludwig Thiele was asked in an interview
why the bank kept so much of Germany's gold overseas. His response
emphasized the importance of the dollar as the world's reserve currency:
in your home safe is not immediately available as collateral in
case you need foreign currency. Take, for instance, the key role
that the US dollar plays as a reserve currency in the global financial
system. The gold held with the New York Fed can, in a crisis, be
pledged with the Federal Reserve Bank as collateral against US dollar-denominated
can lead us to only one conclusion: by keeping fewer reserves in
the US, Germany foresees less future need for "US dollar-denominated
The whole situation
mirrors the late 1960s, during a period that led up to the "Nixon
Shock." Back then, the world was on the Bretton Woods System – an
attempt on the part of Western central bankers to pin the dollar
to gold at a fixed rate, while still allowing the metal to trade
privately as a commodity. This led to a gap between the market price
of gold as a commodity and the official price available from the
As the true
value of gold separated further and further from its official rate,
the world began to realize the system was unsustainable, and many
suspected the US was not serious about maintaining a strong dollar.
West Germany moved first on these fears by redeeming its dollar
reserves for gold, followed by France, Switzerland, and others.
This eventually culminated in Nixon "closing the gold window" in
1971 by ending any link between the dollar and gold. This "Nixon
Shock" spurred chronic inflation throughout the '70s and a concurrent
rally in gold.
entire international community is thinking back to the '60s, because
Germany isn't the only country maneuvering away from the dollar
today. The Netherlands and Azerbaijan are also discussing repatriating
their foreign gold holdings. And every month, we hear about central
banks increasing gold reserves. The latest are Russia and Kazakhstan,
but in the last year, countries from Brazil to Turkey have been
adding to their gold holdings in order to diversify away from fiat
And don't forget
China. Once the biggest purchaser of US bonds, it is now a net seller
of Treasuries, while simultaneously gobbling up gold. Some sources
even claim that China has unofficially surpassed Germany as the
second largest holder of gold in the world.
'60s, today there is no official gold window to close. There will
be no reported "shock" indicator of a dollar flight. This demand
by Germany may be the closest indicator we're going to get. Placing
blame where it's due, let's call it the "Bernanke Shock."
One to Know One
last month's Gold
Letter, I wrote about the three pillars supporting
the US Treasury's persistently low interest rates: the Fed, domestic
investors, and foreign central banks – led by Japan. I examined
how Japan's plans to radically devalue the yen may undermine that
country's ability to continue buying Treasuries, which could cause
the other pillars to become unstable as well.
investors and even the Fed might be deluding themselves into believing
US bonds are still a viable investment, Germany's repatriation news
makes it clear that foreign governments are no longer buying the
propaganda. And why should they? If anyone should appreciate the
real constraints the US government is facing, it is other governments.
sovereign creditors know that Ben Bernanke and Barack Obama are
just regular men in fancy suits. They know the Fed isn't harboring
some ingenious plan for raising interest rates while successfully
selling back its worthless mortgage and government securities. Instead,
the Fed is like a drug addict making any excuse to get its next
Bernanke's tell-all interview with Oprah where he confesses to economic
should be as shocked as the Bundesbank about the Fed's deception.
While we cannot redeem our dollars for gold with the Fed, we can
still buy gold with them in the open market. As more investors and
governments choose to save in precious metals, the dollar's value
will go into steeper and steeper decline – thereby driving more
investors into metals. That's when the virtuous circle upon which
the dollar has coasted for a generation will quickly turn vicious.
Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse. His
latest book is The
Real Crash: America's Coming Bankruptcy, How to Save Yourself and
© 2012 Euro Pacific Capital
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