India "May Use" Gold Reserves to Fight Crisis
Wednesday, 8/21/2013 15:39
Echoing India's 1991 crisis, gold bullion could be leased to raise cash...
AMID a new balance of payments and currency crisis, the Indian government is considering whether to use its official gold bullion reserves to raise a cash loan, according to local press reports.
India pledged 67 tonnes of gold bullion against an emergency loan in 1991, raising $2.2 billion but also needing to airfreight the metal – 47 tonnes to the Bank of England and 20 tonnes with Swiss bullion bank UBS – to allay concerns over the collateral.
Holding a total of 557 tonnes today, India has the world's 11th largest gold bullion reserves.
But 200 tonnes of that hoard – bought by the Reserve Bank of India from the International Monetary Fund in late 2009 for $6.7bn – remains overseas, ready for sale.
"By swapping gold for a payable currency," said David Gornall, head of precious metals at French bank Natixis and current chairman of the London Bullion Market Association, speaking this weekend at the India International Gold Convention in Jaipur, "you can benefit by having access to dollars for a period of your choice,
while remaining a long-term holder of the gold.
"The swap is a transfer of asset for a limited period," he is quoted by the
Hindu Business Line.
Gold swap interest rates have risen throughout 2013, even as gold prices have slumped, offering would-be lenders of bullion the best returns since the Lehman Brothers crisis of late 2008.
British bank Barclays says the current crisis – which has seen the Mumbai stock market drop by one-eighth in a month, and driven the Rupee to record lows on the currency market – looks very much like the balance of payments crisis of 22 years ago.
Should India pledge all its gold bullion for a swap, Gornall estimates it would raise short-term funds of $23 billion.
High prices could see record sales of gold by Indian households, according to both the Bombay Bullion Association and All India Gems & Jewellery Trade Federation.
Domestic premiums above global gold bullion prices have edged back from record-high levels near $50 per ounce, according to the
Business Standard. But "If jewellers offer incentives, people will bring in their old jewelry more and more," Reuters quotes Bachhraj Bamalwa, director of the All India Gems trade association.
Gornall's speech "shocked" the IIGC according to a report today from specialist metals site MineWeb. The Reserve Bank's 200-tonne purchase of 2009 "was [also] misinterpreted by many at that time," MineWeb quotes an un-named official, "[because] it could further inflate the gold price when the price was already at a ruling high."
Instead, says the official, "India’s purchase of gold was a reserve management strategy."
European central banks regularly loaned out portions of their gold bullion throughout the 1990s and early 2000s, reducing but continuing the practice to earn a yield from their large reserves as the financial crisis began.
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