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German Central Bank: Gold Revaluation Account Underlines Soundness of Balance Sheet

The comments below are an edited and abridged synopsis of an article by Jan Nieuwenjuijs

Joachim Wuermeling of the German Bundesbank (BUBA) says that the soundness of the bank’s balance sheet, considering general losses, is guaranteed by the bank’s Gold Revaluation Account, implying that the bank is willing to use that account to cover losses.

German Central Bank: Gold Revaluation Account Underlines Soundness of Balance Sheet - BullionBuzz - Nick's Top Six
Large gold chart in the center, next to several smaller ones. All in gold.

Nieuwenhuijs presents an introduction and follows with BUBA’s press conference discussing its gold revaluation account (GRA).

The Bundesbank hasn’t ruled out the possibility of writing off government bonds to pay off debt using GRAs.

The barrier for central banks to use their GRAs can be overcome. Why else would BUBA bring up its GRA regarding losses? And why is the finance ministry so confident it doesn’t have to recapitalize its central bank? All it takes is a change to the accounting rules, which central banks do in every crisis.

There are implications if central banks choose this path. One, using GRAs emphasizes the fact that fiat currencies devalue against gold over time, stimulating more central banks, corporations and households to buy gold and reap revaluation benefits in the future as well.

Two, suppose BUBA uses its entire GRA to cover losses. To avoid its net equity turning negative, the European Central Bank would have to put a floor under the gold price, with all due consequences.

Three, if central banks truly screw up and losses explode, they will need to raise the gold price to expand their GRAs and mop up all losses. In this scenario a floor under the (new, higher) gold price is required, too. There is no upper limit to a GRA, as fiat currencies can be printed to infinity, as opposed to gold.

Using GRAs increases gold’s role in the monetary system and lifts the price. A higher price deleverages and stabilizes the international monetary system, creating a larger monetary base without counterparty risk (gold) to support the level of credit. From a historic perspective that base is relatively small. If additional revaluation advantages can clear more debris from reckless monetary policy in the past, that’s a good thing.