The Great Gold Migration: What’s the Plan?
Imagine sitting on a treasure chest filled with gold. But instead of keeping it nearby, it’s halfway across the world. This is exactly the dilemma the Reserve Bank of India faced when they decided to move one hundred metric tonnes of their gold from the UK back to India. Why was it there in the first place? And why bring it back now? The answer might surprise you…
Imagine you’re sitting on a treasure chest. Not just any treasure chest, but one filled with gold. Lots of gold. Now, imagine that this treasure is not sitting in your backyard but halfway across the world. This scenario might make you wonder, “Why would anyone keep their treasure so far away?” This is the question the Reserve Bank of India (RBI) faced when it decided to move one hundred metric tonnes of its gold stored in the United Kingdom back to India. But why was it there in the first place? And what does this gold actually do?
The RBI currently has eight hundred and twenty-two metric tonnes of gold. Moving one hundred metric tonnes back home might seem like a significant shift, but it is only a little over ten percent of their total gold holdings. The more intriguing part is that there are still over four hundred metric tonnes of gold in the United Kingdom. So, the immediate question is, “Why keep it there, and what good is this gold if it’s stored abroad?”
Gold sitting in a vault isn’t doing much. It takes up space, costs money to store, and just lies there, gathering dust. You can only truly unlock its value when you sell it. However, selling gold, especially in large quantities like a few tonnes, isn’t as straightforward as it seems. For gold to be traded efficiently, you need a market that is transparent, liquid, and competitive. It must have many buyers and sellers, fair play, and some degree of security.
London offers all of this. It is the most liquid market for physical gold trading, with many buyers and sellers. Supporting this market are vaults, specialized transportation companies, bespoke insurers, and customs handling firms. The Bank of England’s vault, where the RBI holds some of its gold, boasts state-of-the-art security, including biometric scanners, motion detectors, round-the-clock surveillance, and reinforced construction designed to withstand various threats. Remarkably, they have never had gold stolen from them. Ever.
Additionally, the London Bullion Market Association (LBMA) oversees the gold and silver markets in London, ensuring the quality of the gold and fair trading practices. This makes London the ideal place for the RBI to store or trade its gold, especially if it needs to exchange it for foreign currency.
But why not another country with a similar infrastructure? Or why can’t India position itself as a global trading hub for gold?
The answer lies in history. London didn’t become the central hub for gold trading overnight. This status has been centuries in the making, going 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. Soon, refiners, banks, and businesspeople started dealing in gold. The Rothschilds, for instance, set up the Royal Mint Refinery in 1852 in London during the gold rush. Gold came from California, Australia, and South Africa. As the capital of the British Empire, most of this gold made its way to London for processing, sale, and use, further bolstering its position in the global gold market.
By the 20th century, when countries began backing their currency with physical gold, London had already transformed into a global hub for gold trading, with most of the supporting infrastructure in place. They just had to maintain their near-monopolistic status, which they did, despite the rise of American influence.
So, the real question isn’t why the RBI stores its gold in London but why they are bringing some of it back now.
The RBI says there’s nothing to it, but maybe they aren’t comfortable holding over fifty percent of their gold abroad. The United States and the United Kingdom have, in the past, unilaterally seized Russian gold held in their banks. This might have spooked some countries. If it can happen to Russia, why can’t it happen to us?
Maybe that’s why the RBI is de-risking. Holding that much gold in London for convenience and ease of business might not be the smartest thing to do given the current geopolitical scenario. And so, the RBI decided to bring some of the gold back to India.
Imagine you’re a farmer who stores some of his grain in a nearby town because it’s easier to sell there. But one day, you hear rumors that the town might seize your grain. You’d probably want to bring some of it back to your own barn, just in case. That’s essentially what the RBI is doing.
But this raises another interesting question: Will India ever become a global hub for gold trading? What challenges and opportunities lie ahead for the country in this glittering journey?
References
RBI moves 1 lakh kg of gold from UK back to India, first such move of this quantum since 1991. (2024, May 31). The Economic Times.
The real reason why RBI stores its gold in London. (2024, June 4). Finshots.
What made RBI move 100 tonnes of gold from UK to its vaults? Here’s an explainer. (2024, June 1). Business Today.
