why will it take the fed 7 years ?, page-74

I haven’t been paying too much attention to the threads relating to the repatriation of gold from central custodians such as the Fed and the Banks of England to countries such a Germany or Venezuela. It doesn’t seem to have much to do with what is going on with the price of gold.

The trend does raise some interesting questions about why countries bother to hold gold reserves at all.

If we accept that the purpose of reserves (of any kind) is to ensure that a country can meet its international obligations to other countries, or sustain a preferred valuation for the domestic currency unit, I would have thought that it made sense to hold those reserves somewhere where they can be deployed in a timely fashion, to either meet international obligations, or fund the support of the local currency. Holding gold in London, New York or some other financial centre seems the obvious place to store the collateral used to stabilize a countries international financial position. Hording it “under the bed” means that it is not available for immediate use.

Why is timeliness important?

When the Bundesbank borrowed US dollars from the US Fed to save Deutschebank in November 2011, even a short delay in the settlement of the dollars may have caused the collapse of Deutschebank and potentially to collapse of the global financial system. The fact that the Fed could deliver the dollars intra-day, meant that the German bank could meet its dollar obligations without delay, sustaining confidence in the bank, and ultimately saving it from default. Immediate availability of the funds was critical!

So if a country holds its gold reserves with the Fed or the BoE, the gold can be used immediately by that country at a time of financial distress as collateral against loans that it would use to fund its international obligations or support its currency. If they withdraw the gold from the Fed or BoE and return it home, the gold can no longer be used as collateral until it is transported back to an accepted custodian. In these times of rapid flow of international funds, where a crisis can emerge in hours, reserves that take weeks to deploy are of little practical use.