Quite an interesting headline it
was. India's Central bank seeks to swap gold to improve reserve quality – was
the headline of the news earlier this month.
….. The Economic Times reported earlier that the RBI had sounded
out bankers on a plan to swap some of the old, relatively impure, gold that
has been lying in its own vaults since before independence in 1947.
MORE
SUPPLIES
Market
participants said the central bank was likely to offload its old gold onto
the local market in India....
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Knowing Indians' love for gold,
the move has been touted as a courageous step in curtailing not only smuggling
of gold by consumers but also as a way to improve India's management of its
foreign currency and gold reserve. The
gold sold on the open market, thus, would remain in the hands of consumers and
not with the central bank.
Again from the same Reuters article
…. The central bank imposed the import restrictions last year in
a successful bid to contain a balance of payments crisis, but the unintended
result has been a large increase in gold smuggling into India, the world's
second largest consumer of the precious metal after China.
Part of
India's consumption was met through illicit imports. The WGC reckons that
200-250 tonnes of gold have been smuggled into India since the imposition of
import controls. Only 2.5 tonnes of smuggled gold - or 1 percent of the
estimated total - have been seized by law enforcement agencies.
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So far so good. But now comes the
curious part.
…. MUMBAI, July 2 (Reuters) - India's central bank said on
Wednesday it has sought quotes from banks to swap gold in its own vaults for
international-standard gold, aiming to improve the management of its
reserves.
The Reserve
Bank of India said the operation would "standardize the gold available
with RBI in India with respect to international standards" and the gold acquired would be delivered to its
overseas custodian, the Bank of England.
By holding gold reserves in London, the RBI
would gain flexibility to mobilize them if needed to defend the currency. It
shipped some of its gold holdings to Britain in 1991 as part of a series of
emergency measures to tackle a financial crisis
…..
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Re-reading the highlighted
statement brings a number of questions to mind.
1. Is it a good move to store gold in off-shore
vault, in this case Bank of England's vault?
Consider the case of Swiss
parliament which is set to vote on referendum that will force Swiss national
bank to hold 20% of its reserve in gold, forbid it to sell such assets, and,
moreover, hold these gold assets in Switzerland only.
Swiss
Parliament Recommends Rejection of Initiative on SNB Gold
[snip]
...Swiss
parliamentarians urged rejection of a popular initiative that would curtail
the Swiss National Bank (SNBN)’s independence by requiring it to hold a fixed
portion of its assets in gold.
Members of
the Swiss parliament’s lower house voted 129 to 20 with 25 abstentions today
against the plan, which demands that at least 20 percent of the central
bank’s assets be in gold. It would also disallow the sale of any such
holdings and require all SNB gold be held in
Switzerland. …
[snip]
...As of
April 2013, more than 70 percent of the SNB’s gold was in Switzerland, with
about 20 percent at the Bank of England and 10 percent at the Bank of Canada,
according to Jordan. ...
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2. What percentage of gold reserve
will be kept in the vaults of a foreign central bank if, at all, it becomes
necessary to store it outside the country?
3. When all the currencies of the
world are getting hammered, is it a wise move to keep gold reserve in the
foreign bank?
4. Will the gold, that will be
swapped with Bank of England, be physical gold or paper gold?
5. And, finally most important,
will India be able to periodically check the inventory of its holdings in Bank
of England?
Take, for example, this news item
that appeared in Deutsch-Welle
… Tracking down Germany's gold
About half
of Germany's gold reserves are stored in the United States, but it's been so
long since they were allowed in to see it, that some German politicians are
asking whether it is still there. …
…For decades around half of the German government's gold reserves
- some $80 billion (62 billion euros) worth - has been stored in a vault deep
below the US Federal Reserve building on Liberty Street in New York. Or at
least that's what the US authorities have said. But those assurances
aren't enough for some German politicians who are asking: how do we know our
gold is really there?...
... "I
think the Euro crisis forms the background to what is a slight paranoia in
Germany right now. The mood was not improved by reports that the New York Fed
was refusing permission to German politicians to visit the gold, on grounds
of security. But that's not the way all bullion companies work, said Adrian Ash,
a gold analyst, at BullionVault.com, a company that holds some 30 tons of
bullion for private investors.
...Some
Germans now say that given the uncertainty swirling around the Euro, their
gold reserves should be brought home and stored on German soil. That would be
better for the nation's peace of mind.
...In a bid
to assuage German anxieties, the Bundesbank is now reported to be considering
a token repatriation of German gold. Plans are said to be afoot to bring back
150 tons of it from New York, but that's just 10 percent of the total held in
New York.
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Read the whole thing. It is quite
an interesting article and raises one's doubts about this whole gold swap
business and storing the precious metal in foreign bank vault.
India intends to purchase gold
internationally and deliver it to Bank of England for storage. In spite of the
lofty reasons given for such a move, something just does not smell right.
The question, therefore, is: Is
there anything more to it than meets the eye?
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