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The intention of The Golden Chalkboard is to feature a focused selection of data or rare commentary that I think will be useful to enhance your insights into the gold market and the monetary system.

"Ernst Welteke" Voices a few Thoughts
A few key graphs and commentary suggests why the Deutsche Bundesbank President
would, as he has since February 2002, openly contemplate sales of German gold reserves
such as documented below by Reuters and MK.

BASEL, Switzerland, Jan. 11 2004 (Reuters) -- Bundesbank President Ernst Welteke said on Sunday Germany had made no decision to sell gold yet but that it would seek an option under a new gold agreement. "This doesn't mean we will sell gold. It means we want an option to sell gold. Whether we exercise it or not is another question," he told reporters. The German central bank president said there was no agreement with the government to sell gold as a newspaper had reported on Sunday. Welteke said on the sidelines of meetings at the Bank of International Settlements that if there were any agreement on gold sales he would know about it. European central banks are expected this year to renew a gold sale agreement that expires in September that for five years has specified the amount of gold each bank can sell.

MK (1/11/04; 16:41:14MT - usagold.com msg#: 115105) [excerpted from this page in the archives] On Germany's Gold and the Faustian Bargain The earliest reference I could find to Ernst Welteke obsession with gold sales was in February, 2002. "The Privateer" reports Welteke as saying that Bundesbank should sell gold and reinvest the proceeds so that **the interest could be used to pay off the German national debt.** In March, 2002, Welteke was guoted by the German newspaper, "Der Tagesspiegel", as saying that the Bundesbank should sell gold to **help finance public infrastructure work.** In April, 2002, Welteke was quoted in "AFP" as saying that the Bundesbank should sell gold to invest in **blue chip shares and shares listed on the Euro-stoxx-50.** In September, 2002, Virtual Metals' "Gold, Energy & Commodities" reports Welteke to have suggested that Germany's gold reserves be sold to **provide relief for victims of natural catastrophes** (like the floods which ravaged Germany and central Europe in the summer of 2002). I also recall (but not certain) at some point between February 2002 and the present, Welteke mentioning selling Bundesbank gold to provide funds for **environmental clean-up** (though I cannot at the moment find the reference.) Now, "Bloomberg" reports that in broad-band fashion, Welteke would like to sell Bundesbank gold to **promote education and research** So, to what do we owe Mr. Welteke's rather irritating and chronic obsession with the sale of Bundesbank gold? One would think that given enough time, he would entice every possible consituency in Germany with what could be done with the proceeds from the sale of the German people's gold. It has been speculated that the real reason for the sales has little to do with any of the above, but a long-forgotten merger between Bankers' Trust of New York and Deutschbank many years ago -- a merger in which a $10 billion gold loan book (as estimated in some quarters) was passed between the United States and Germany. Now that obligation may have become a sine qua non for the German national bank. Those old gold loans have to be repaid assuming they haven't already. They are owed to some other central bank somewhere in this gold-starved world. And in a world where gold in any size is the object of much competition (if it's available at all), a central banker must secure the asset where he finds it. Why else would someone come up with so many different questionable reasons to sell Germany's patrimony? As lender of last resort, the bail-out obligation of the central bank extends to gold loans as well as the kind you can print into obscurity, and that, I believe, more than anything, explains Welteke's obsession. As someone pointed out here recently, and I have said on numerous occasions, it is not the central bank which controls its commercial constituency, but the other way around. Speaking of patrimony, I can't help but allude to Mr. Welteke's speech to Germany's Monetary Stability Foundation (of all groups) in December, 2002. In that speech, he quotes the great German philosopher/playwright, Goethe: "What you have inherited from your fathers / Earn over again for yourselves, in order to possess it." Welteke offered the quote in reference to the central bank's obligation to preserve the national asset structure through a sound monetary policy. One might conclude from the Goethe reference, that Welteke would be content to let the German gold-heritage go at these prices in order for the German people to earn it back again for themselves at $1000 per ounce. Somehow I don't think that's what the great Goethe had in mind. To be sure, he would most likely blanche, as a matter of fact, at such Faustian bargains. MK

At the Discussion Forum this topic inspired the launch of a new price-guessing contest, to include this whimsical entry requirement:

...to accompany the Price prognostication, each guess must be accompanied with a completion of the following statement:
"Hi ! My name is Ernst Welteke and I think that Germany should sell its Gold because ---" (in thirty words or less).

Of the various entries (some whimsical, some serious), the following offered some good food for thought, reproduced here along with the inclusion of a few key graphs referenced in the commentary which I am now happy to provide (using the flexibility available under this off-Forum format). --Randy

Ernst Welteke (01/12/04; 09:24:45MT - usagold.com msg#: 115156) [excerpted from this page in the archives]
**** EUR 333.0 *****
Hello. Allow me to clear the air if I may.

My name IS Ernst Welteke, and these many months (as detailed yesterday by Mr. Kosares) I have been speaking of German GOLD sales; not lightly, but to serve a PURPOSE.

First, let me assure you GOLD is center on my radar screen. You will recall that I was tapped 11 May 1999 to take over the office of President of the Deutsche Bundesbank effective 1 September 1999 upon the age-limitation retirement of my worthy predecessor, Hans Tietmeyer. As you should be quick to note, a very significant act within the first four weeks of my Presidency was the 26 September 1999 signing of the Central Bank GOLD Agreement with 14 of my colleagues.

It was not an accident on 19 February 2002 that I initiated what would become an ongoing controversy among the GOLD community with my interview remarks to Bloomberg TV.

On that day I said, "We have significant GOLD reserves in the Bundesbank, and of course we are happy if the GOLD price rises. I could imagine that we slowly sell some of this GOLD and reinvest the revenue in assets that pay interest. ... We should in no case sell the GOLD reserves to pay off federal debt or finance new spending. At best, we should use the interest to reduce the debt."

Please receive those comments in their proper financial context -- at that time, from January to mid-February GOLD had steeply risen by EUR 40 per ounce ($30) -- coming at a time which that move was deemed inauspicious. If you will but look at a 4-year chart of GOLD in both euro and dollar terms, you will see at PRECISELY that point in February the euro/GOLD chart has demonstrated stability, whereas the dollar/GOLD chart has continued to come undone.

It is probably not an accurate worry that you deem me to have an "obsession" for the sale of "the German people's GOLD" or "patrimony". This is no idle obsession, and more to the point, strictly speaking, this is not the people's GOLD. Please bear with me.

Our situation in Germany is not exactly the American experience. In your case, the GOLD within your Federal Reserve banking system was appropriated by your people's Roosevelt government in 1933. It now truly belongs to your people's governmental Department of Treasury. And how even now, may I ask, might a U.S. citizen go about to lay claim on their share?

The primary quantity of GOLD still being held by your Federal Reserve banking System is therefore not the original metal forming the basis of that monetary institution, but is the GOLD they have been holding as custodians under earmark to international institutions such as our Bundesbank.

By contrasting experience, meanwhile, our institution has not been so looted by an overreaching government. Rather unlike the Federal Reserve's experience, it has been granted by Parliament of our Federal Republic of Germany that the Deutsche Bundesbank be independent of the instructions from Community institutions and government bodies such that the Bundesbank (similarly the ECB) remain free to pursue the mandate of price stability and the holding and managing of the foreign reserves (including GOLD) which were accumulated as a result of years of our past institutional operations. Please, do think about this carefully and what it portends to patrimony. You will likely find it more agreeable to the people it serves than the "looted" GOLD of the American experience.

All activities to date, this includes 110 million ounces of GOLD and receivables that we own and hold as reserve assets, which internally we now revalue monthly against our so-called "hidden reserve" revaluation account represented as a balance sheet liability.

As I said to the German newspaper FAZ on 18 October 2001 regarding our accumulated monetary reserves and the balance sheet, "The monetary reserves result from the Bundesbank's monetary policy activities in the past. The corresponding items on the liabilities side of the balance sheet are banknotes in circulation and deposits of credit institutions.

"The monetary reserves therefore cannot simply be extracted from the balance sheet without being replaced by another asset. They are not a kind of treasure trove which can be freely encashed without any counter-obligation.

"However, should they be sold -- against payment of the corresponding price by the purchaser -- the reserves contained in the "revaluation accounts" could be booked as a capital gain and distributed with the Bundesbank's profit. Another point to bear in mind is that monetary reserves still play a key role in reinforcing public confidence in the currency and anchoring the credibility of the national central banks."

And to be sure, any considerations of direct withdrawal and transfer of reserves "to other public institutions or any attempt by government agencies to influence the Bank in its task of managing the monetary reserves would breach the EC Treaty [Article 105 (2)] and infringe the Bundesbank's independence." To that end, although we subscribed our EUR 12.2 billion share, 15% of that in GOLD, of the original EUR40 billion in foreign reserves to the ECB, the foreign reseves shall continue to be held by each national central bank, with nonsubscribed reserves subject to transaction approval by the ECB above certain volumes to maintain a consistency of E.M.Union-wide policy.

This brings us back to the topic of GOLD sales. Why would we talk publically about consideration of sales or actually pursue such sales? I assure you, it would not be to increase the dollar-portion of our reserve position! If we hint about it now, or if we sold GOLD in coming years, it would all be for leverage -- using GOLD for the purchase of political advantage in a larger picture.

On the one hand, I think it fair to say we have moved beyond the role of "lender of last resort" in the realm of bullion banking. If a commercial bank experiences an underwater position on its GOLD books, why would we risk metal to aid a hung counterparty when the dollar-system so easily allows such contract problems to be brusquely obscured with a lush hedge of derivatives? A paper solution to a paper contract problem!

On the other hand, there is the wider needs of GOLD within the official sector to attend to. Close to home we have ten acceding countries to the EU that shall initially pay 5% of their subscription share to the ECB. Then after at least two successful years under ERM II toward fulfilling the Maastricht convergence criteria, when the euro is adopted by each country their full subscription share is due, with expectations of 15% of the total as GOLD. Currently the GOLD holdings of these ten countries average less than a 4% share of their total reserves. In the big picture, it may be prudent for all parties concerned for an existing GOLD-rich EMU neighbor to ensure that these countries have no hardship securing access to any necessary GOLD.

More significantly, GOLD can be spent like political capital in buying the euro-friendly cooperation of significant economic bodies like China that may seek GOLD yet find it impossible to acquire at standard market outlets.

With a history of the American penchant for looting GOLD residing uppermost in your mind, if you were the President of an overseas entity that had a share of its precious GOLD being held under earmark by an American institution in New York (the Federal Reserve Bank), wouldn't you want to put your mind at ease, and perhaps even kill two birds with one stone? How might you go about this?

You start talking. If your friends are in need of GOLD, you make sure the price does not too soon get out of hand. Perhaps you prematurely mention the possibility of sales. Your friends will know you are serious about coming through for them.

Additionally, you do not want to ruffle feathers in Washington or New York by letting them think that you question their integrity as a custodian of your GOLD. You certainly do not ask to have it shipped back to you on your own behalf for no good reason.

What you CAN do, however, is to sell this quantity of earmarked GOLD in good faith to China, for example, who can then in good faith as the new owner announce that it is their national policy to request delivery of their new purchase for official CB holdings and also to help feed the growing domestic demand in their newly liberated GOLD market. Can you connect the final few dots for yourself and figure out WHY it has been liberated at this juncture in time?

And so you have it. Some talk to smooth the GOLD charts, and some sales as a fair price to achieve various long-term political ends. That is, buying a new monetary system at the lowest possible social cost; with absolute minimum of feather-ruffling or anything approaching a reapeat of the Great War(I).

In the end, I may not actually prove to be a spokesman for the Bundesbank, but you'd do well to heed this tale nevertheless.

Like a Rolling Stone: "Pleased to meet you. Won't you guess my name?"

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