India’s Central Bank Will Sell Gold on the Market in Exchange for Gold at the Bank of England

Screen Shot 2014-07-02 at 3.50.34 PMIndia’s gold policy over the last several years is about as dysfunctional as any government policy I have ever seen, and that’s saying a lot. In case you need a reminder, here are a few posts I have written on the subject:

The Times of India: “Almost Every Passenger on a Flight from Dubai to Calicut Was Found Carrying 1kg of Gold”

Gold Smuggling Increases 7x in India and Surpasses Illegal Drug Trade

Indian Temples Fight Back Against Government Gold Grabbing Plot

In a nutshell, Indians were buying too much gold for their government’s comfort, so the “authorities” stepped in with duties and import restrictions in an attempt to stifle the trade. So smuggling soared.

Fast forward to today. It appears the government has finally realized they can’t stop their citizens penchant for gold, so they have decided to dump central bank gold onto the market. What is incredible to me is that they are justifying this with a so-called “swap” into phantom gold at the Bank of England. The favored global hub of shady, rent-seeking, banker oligarchs.

What’s even more interesting about this is the fact that so many Central Banks seems to be swapping or selling their gold to Western interests. Most notably Ecuador selling to Goldman Sachs, which I highlighted in the piece: Ecuador to Transfer More Than Half its Gold Reserves to Goldman Sachs in Exchange for “Liquidity.”

Now from Reuters:

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 “standardise 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 mobilise 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.

This begs the question of who really needs the gold, the RBI, or London bankers?

According to the World Gold Council, India holds the 11th-largest gold reserves of 557 tons. At current market prices, they would be worth nearly $24 billion. It was not immediately clear how much of that would be swapped.

Market participants said the central bank was likely to offload its old gold onto the local market in India.

At least the people will get a hold of it as opposed to criminal Central Bankers.

That would have the beneficial effect of boosting domestic gold supply without hitting India’s current account – which faces renewed pressure as the conflict in Iraq has pushed up India’s oil import bill.

“It’s a good move by the RBI, this will at least ease the stock requirement of the jewellery industry,” said a senior official with a foreign bank that supplies gold to India.

You have to wonder if this in any way relates to concern about the upcoming Swiss referendum on the country’s gold reserves, which Parliament has been fighting hard to prevent from happening. For example, back in May Bloomberg reported that:

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.

No date for a national vote has yet been set.

Well it appears based on a Bloomberg headline from this morning that a date has been set. A friend sent me the following:

(BN) *SWISS TO VOTE NOV. 30 ON `GOLD INITIATIVE’

There may be some very concerned bankers in New York and London this weekend.

Full article here.

In Liberty,
Michael Krieger

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13 Comments

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  1. I thought the Modi government was going to be more sensible in regard to gold and now we read this? Bizarrely, I have to hope that there’s some kind of incredible extortion going on behind the scenes.

  2. Kiss your gold goodbye. I thought the Indians were dick heads and this confirms it.

  3. Awhile ago, I read a BBC article interviewing the new head of India central bank. In that article, not a single word mentioned ‘Gold’ and people telling me BBC is an unbiased organisation.

  4. So is it correct to say they are selling their current gold reserves on the domestic market (to whatever degree they can keep it in-country), and taking the proceeds to buy “gold” in london? Or They are just swapping directly with London their old gold, for new and improved “gold”.
    Or some combination of the two?
    Either way, the Reserve Bank of India gets “gold”

  5. Here’s the “0” comments section on Reuters. This article came out YESTERDAY!!!!

    “This discussion is now closed. We welcome comments on our articles for a limited period after their publication.”

  6. I’m going through MANY older articles on Reuters and the comments section are all still open. Days and days later you can comment on anything except this article about gold and India.

    Comments closed next day. No discussion allowed. Fk Reuters.

  7. “It appears the government has finally realized they can’t stop their citizens penchant for gold, so they have decided to dump central bank gold onto the market.”

    Assuming that the RBI will be taking Gold off the international market in the form of Good Delivery bars (that would have otherwise been available to other market participants), then the net effect on the Gold market of selling the existing RBI holdings locally should be minimal (if any at all).

    The RBI already has 265 tonnes of their Gold abroad, so we are talking about a maximum amount of under 300 tonnes being sold to the local market (in exchange for an international purchase), they would normally import this amount every 4 months.

    You state that India has dysfunctional policy in regards to Gold, but changing their holding into an internationally recognisable and tradeable format seems like the opposite of that to me. If anything it highlights increasing re-recognition that Gold as an important asset by Central Banks (although Germany is repatriating some of their Gold, they are also converting it into Good Delivery Bars while in transit).

    I would be interested to hear how you can justify your implication that India standardising their Gold reserves is “dysfunctional policy”…

    • Michael Krieger

      Because I do not think that is what they are doing. Again, this comes down to you believing the RBI at face value for what they say while I do not. I will tell you what I think is happening. Of course, I understand this is my opinion not fact, but that’s what this blog is, my opinion based on mainstream news information.

      I believe the Indian government is sick of all the smuggling, the premiums, etc, as a result of their duties. So they have decided to feed the domestic market will bullion. Reuters states that:

      “Market participants said the central bank was likely to offload its old gold onto the local market in India.”

      Indians like physical gold, not paper gold and the RBI is providing this to the people. That’s fine by me. As far as them receiving gold in the Bank of England, again, first I do not believe that any sovereign nation should store more than a tiny amount (10% max) of gold reserves overseas in these times of currency debasement. This is because in a crunch said nation would not be able to attain the physical gold. Second, I think that the large Western central banks play a game with whatever gold reserves they have. Selling ownership of the same metal to multiple parties, hoping no one ever calls the gold. It’s just fractional reserve gold banking and I think the Bank of England is big time involved in this game. Personally, I think you’d be naive not think this happens, but I also recognize this is opinion.

      So I think India is satisfying physical demand internally and playing the central bank fractional reserve game externally. That’s my opinion.

      Best,
      Michael Krieger

    • So what evidence or observations have helped you form the opinion that the Bank of England is leasing out Gold multiple times?

      You think they are doing this with the holdings of other central banks (who are unaware of it happening)?

    • Michael Krieger

      As I mentioned in my earlier comment, this is admittedly opinion. That being said, this idea of issuing more claims to gold than gold existing in inventory is as old as money itself. Once goldsmiths realized they could issue more paper claims on gold than gold existing due to the fact that such a small fraction ever came to remove the physical they did so. This is essentially fractional reserve banking, the system we operate under today.

      Essentially everything in today’s financial world is based on fractional reserve banking and leverage. The idea that everything is done in this manner, but that the gold market is somehow 100% backed is in my opinion naive and ridiculous. Again, this is merely my opinion until proved otherwise, but I believe Central Banks view the gold market in the same way they view the banking system. On a fractional reserve basis. This is the ideology of the financial system itself, so to think Central Bankers wouldn’t operate with the same moral and philosophical basis with regard to gold is in my opinion absurd.

      As far as other central banks, yes I think they basically know that Central Bank gold runs on a fractional reserve basis. Again, since I think this is the orthodox philosophy of all Central Bankers, they are ok with it. So yes, I think they basically all turn a blind eye to the practice, because although they know the public would be horrified by this state of affairs, they are philosophically in favor of it.

      Best,
      Michael Krieger

  8. The ads on both sides of the page make this really hard to read, I see about 5 inches wide column.
    think about ads one side only.
    Also the light text on light background do make my eyes strain a little. Contrast is key.

  9. FortyTwoIsTheAnswer

    Applying a bit of paranoia, maybe there isn’t enough gold on the market for those who want it, say some of the oligarchs. This is a way to transfer the gold from the central bank to individuals while making it look legitimate and a “benefit to the jewelry industry.”

  10. that was a legit reason and much agreed alan

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