Posted Wednesday, Jan. 16, 2013, at 3:29 PM
Frank Rumpenhorst/AFP/Getty Images.
The German government announced today that it wants to repatriate a large share of the gold reserves it maintains at the New York Fed and all of the gold reserves it keeps in France. This seems to be basically a political move that's somehow designed to offer people reassurance about German financial exposure to the debts of other eurozone states and banks.
But it's also a dumb idea. Insofar as it makes any sense whatsoever for a government to maintain a reserve of gold, its own central bank is the worst possible place for it. After all, a functioning sovereign state is never going to need gold domestically. Gold reserves initially started being held abroad because you could use them to buy foreign currency from foreign central banks. Nobody really does that these days, but you still could and it argues in favor of offshore holdings. But the only real situation in which a sovereign is going to want to have a gold reserve is in a situation where it loses control of its territory, in which case domestically is the worst possible place for the gold to be.
Imagine a situation in which Russian troops somehow occupy Estonia, sending its government fleeing across the bay to Helsinki, Finland. If there's Estonian gold in London or New York or Paris and the international community continues to recognize the legitimacy of the government in exile then that gold is an asset at the government in exile's disposal. But if the gold is in a vault somewhere in Tallinn, Estonia, then it's completely useless—the Russians already have it. In the real world none of this matters, and governments that have large gold reserves have them more as a historical accident than for any purpose. But insofar as you're going to have a gold reserve, you want to keep it in the vaults of friendly foreign states, not at home.