London Bullion Assn chief’s plan to tide over crisis, continue gold trading

Worried that the gold trade can get gridlocked over the rupee crisis, London Bullion Market Association Chairman David Gornall suggests that India can swap for dollars the 200 tonnes of gold it bought from the International Monetary Fund (IMF) in 2009. This can help the country tide over the problems created by trade imbalance.

“The Reserve Bank of India bought 200 tonnes of gold for $1,045 an ounce from the IMF four years ago. The Government can swap it for US dollars,” said Gornall, who is here for the India International Gold Convention 2013.

According to RBI sources, the gold that India bought never came into the country as the transaction was only a book entry. The gold was purchased for $6.7 billion, in cash. Asked about this, Finance Ministry officials said the RBI will have to take a call on swapping the gold for dollars.

Earlier, in his inaugural address, Gornall said the RBI can organise the gold-dollar swap without divesting its holding or incurring any further interest charge to access $23 billion.

“By swapping gold for a payable currency, you can benefit by having access to the dollar for a period of your choice, while remaining a long-term holder of gold as the swap is a transfer of asset over a period. You will have bullion bank counter-party risk but this is successfully managed at the RBI which has strictest lending criteria of any central bank in the world.”

Making it clear that he is not advocating sale but only swap of gold, Gornall said in this case gold and the dollar will provide collateral for each other.

Pointing out that gold had in the past climbed above $1,900 an ounce and crude oil over $100 a barrel, he wondered how the current account deficit was not as bad then as it is today. “India has always had a deficit, a structural deficit, so what’s different today?”

Turkey model

Referring to the recent hike in the import duty on gold, the LBMA chief said it will only lead to smuggling.

Gornall said India should take a leaf out of Turkey’s example, adapt and improve on it to suit the current situation. In 2001 and 2009, Turkey’s current account deficit soared, currency fell and foreign exchange reserves dropped even as inflation hit 10 per cent. Based on the 1998 South Korean strategy, it decided to come up with a gold deposit scheme.

Though Turkish citizens didn’t donate gold like the Koreans did, the announcement of the plan resulted in markets buying the Turkish Lira.

This resulted in the exchange rate improving and the current account deficit falling even before the scheme became fully operational.

“There is a lesson to be learnt here,” Gornall said.

(This article was published on August 17, 2013)
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