Alex’s notes: Pay special attention to this, because it is very rare to see a bank admit that the underlying credibility and stability of its creditworthiness is based upon gold.

Gold reserves more important than before-Bundesbank

• Reuters
• , Friday August 22 2008

BERLIN, Aug 22 (Reuters) - Germany’s Bundesbank on Friday rejected calls that it should sell some of its gold reserves to help boost the slowing German economy, telling Reuters financial and political uncertainty make the reserves even more important than before.

“Gold sales are not a suitable way to sustainably consolidate the public accounts,” the Bundesbank said after a query about trade union proposals that it sell gold to fund some of a 25 billion euro ($37 billion) economic stimulus package.

“National gold reserves have a confidence and stability-building function for the single currency in a monetary union. This function has become even more important given the geopolitical situation and the risks present in financial market developments.”

The Bundesbank is the world’s second-largest holder of gold after the U.S. Federal Reserve, and has sold just 20 tonnes out of total reserves of over 3,000 tonnes in the past five years.

These sales were to allow the German finance ministry to mint gold coins, unlike the much more active sales programmes of other central banks which wanted to shift their portfolios from gold to a more diverse array of assets.

To reduce volatility in the price of gold , 15 European central banks agreed in 2004 to limit gold sales to 500 tonnes a year over the next five years.

The Bundesbank is expected to make a formal statement about any gold sale plans around September, when the final year of the Central Bank Gold Agreement starts.

“The Bundesbank reaches decisions about the nature and size of reserves autonomously.

The board of the Bundesbank decides every year afresh about changes in the level of its gold holdings,” the central bank said.