In today's finshots, we tell you why India's central bank—RBI (Reserve Bank of India) stacks up a significant amount of its gold reserves in UK vaults.
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The Story
Last week the RBI said that it had moved 100 metric tonnes of its gold stored in the UK to domestic vaults in FY24. And as one article in Business Today notes — “This significant transfer marks one of the largest movements of gold by India since 1991".
100 metric tonnes of gold does seem like a lot of gold. However, the RBI is currently sitting on 822 metric tonnes of gold. So this is a little over 10% of RBI’s gold holding. The concerning bit however is that there is still over 400 metric tonnes of gold in the UK.
Which begets the immediate question — “Why? Why keep it in the UK and what good is this gold if it’s stored abroad?”
Well, you are right.
Gold stockpiled in a vault is of little use to anyone. It eats space, costs money and slumbers in a dark room. You can only realise gold’s potential when you sell it. However, selling gold can be a bit of a challenge. This may seem counterintuitive to most people, considering gold is almost universally accepted as a medium of exchange, but I am referring to certain logistical challenges. When you are transacting large quantities of gold (say a few tonnes), it becomes imperative to operate in a transparent, liquid market. A market where you have a large number of buyers and sellers. A market where everyone plays fair. And a market that offers competitiveness and some degree of security.
Here, you can get the best price for your gold — irrespective of whether you’re buying or selling.
And London has it all.
They have the most liquid market i.e. this is where most buyers and sellers prefer to trade physical gold and it is aided by a robust supporting infrastructure — vaults, specialised transportation companies, bespoke insurers and customs handling firms. The Bank of England vault (where the RBI holds some of its gold) for instance has state-of-the-art security systems, including biometric scanners, motion detectors, 24/7 surveillance, and reinforced construction designed to withstand a variety of physical and electronic threats. They’re so secure that they have never had gold stolen from them. Ever.
And there is the LBMA or the London Bullion Market Association. This is the organisation that oversees the gold and silver markets in London. They make sure that the gold isn’t bad and that everybody plays fair.
In effect, if RBI ever wanted to store gold or trade in the global markets (exchange the gold for foreign currency for instance), London is the best place to do it.
But wait... Why not another country that has a similar supporting infrastructure? Or why can’t India position itself as a global trading hub for gold?
Well, there are a few challenges.
London didn’t just become the central hub for gold trading overnight. Instead, this has been in the making for hundreds of years — going all the way back to the 1600s and the East India Company. Ships laden with gold and precious metals sailed into London, and a market for gold began to take shape from this plunder. Soon, refiners, banks and businesspeople began dabbling in gold. The infamous Rothschilds for instance set up the Royal Mint Refinery in 1852 in London at the precipice of the gold rush. There was gold coming in from California, then Australia and finally South Africa. And considering London was the capital of the British Empire, most of this gold made its way to the metropolitan centre for processing, sale, and use and this only further bolstered London’s position in the global market for gold.
By the 20th century, when most countries started backing their currency with physical gold, London had already transformed itself into a global hub for gold trading with most of the supporting infrastructure. All they had to do was hold on to their near monopolistic status. And they did (bar the rise of American influence).
So the question isn’t why RBI stores its gold in London. Why are they getting it back now?
Well, RBI says there’s nothing to it. But maybe the Indian Central Bank isn’t overly keen on holding over 50% of their gold holdings abroad. The US and UK have in the past unilaterally seized Russian gold held in their banks. And this may have spooked some countries. If it can happen to Russia, why can’t it happen to us?
Maybe that’s why they’re de-risking. Maybe holding that much gold in London (for convenience and ease of doing business) may not be the smartest thing to do considering the current geo-political scenario. And RBI has finally decided to get some of the gold back to India.
Until then…
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