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Banque de France wants Paris to compete with London for gold trade

Section: Daily Dispatches

Macron Tries to Take UK's Gold Crown as Historic Rivalry Is Reborn

By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, November 11, 2018

Paris has vaulting ambitions to capture a share of the world gold trade from London, reviving its historic role as a top-tier power in the international bullion market.

The Banque de France has teamed up with JP Morgan to offer a full range of swaps, leases, and gold deposits for global central banks and sovereign wealth funds. Global reserve managers will be able to pledge bullion as collateral for deposits or for raising foreign currency on the Paris market.

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Sylvie Goulard, the Banque de France's deputy governor, called it the spearhead of a sweeping shake-up of the French gold industry and left no doubt that one aim is to challenge the hegemonic position of the City of London in bullion dealing.

"While these gold investment services have until now only been offered from London, it recently became possible for the Banque de France to offer them also from Paris. As a resul, Paris could gradually re-emerge as a key marketplace for gold," she wrote in the Alchemist, the in-house journal for the London Bullion Market Association:

While the French plans predate the Brexit referendum, they have taken on fresh salience as President Emmanuel Macron openly strives to peel away some of the Square Mile's banking, wealth management, euro clearing, and insurance business.

Mme. Goulard said the BdF will act as a "principal" for the first time so that foreign central banks can generate a return from gold transactions without taking on counterparty risk, a crucial service in the ultra-cautious world of reserve managers.

One aim is to muscle in on the swap business as gold becomes eligible collateral under the Basel III framework for banks. The BdF is upgrading the quality of its gold reserves to ensure that they meet the LBMA benchmark standard for global trading. It is reported that the BdF is offering much lower storage costs than the Bank of England.

Paris was a hub of the world bullion nexus in the 19th century when the Napoleon 20-franc gold coin rivalled the British gold sovereign and the American Eagle.

The gold reserves of the French Third Republic were stored in the wine cellars of Hotel de Toulouse in Paris until the First World War. Deemed vulnerable, they were switched to the famous Souterraine beneath the Seine River in the 1920s, the deepest and biggest gold vault in the world.

Its underground cathedral of 720 pillars and Dantesque circles, with its 7-ton armored door, were immortalized by the interwar writer Stefan Zweig, who called it the "heart of our economic world, the epicentre of the invisible waves that stir markets, bourses, and banks."

The London gold market -- or "loco London" in trader parlance -- is a hard nut for the French to crack. The Bundesbank has been repatriating gold holdings from vaults in Paris and New York to assuage Germany's "bring-home-our-gold" movement but it has not yet withdrawn any bars from the vaults of the Bank of England.

Peter Hambro, a London gold veteran and president of the Russian miner Petropavlovsk, said the French held onto to most their gold when Gordon Brown sold half the Bank of England's bars at the bottom of market for a quarter of current price.

France sold 580 tonnes under Nicolas Sarkozy -- to great protest -- but remains the world's fifth biggest holder with 2,436 tonnes.

"The Banque de France has an excellent reputation as the manager of the French national reserves of gold and foreign exchange. It is in a select club of countries like China and Russia that still understand the value of gold as a store of value and a medium of exchange that is in itself no one else's promise," Hambro said.

Ross Norman from Sharps Pixley said there is a reason for this stickiness. London remains the most liquid gold market in the Western world by far, with trusted courts under the rule of law. "I haven't heard of a 'loco Paris' gold trade for decades, so it is going to be tough for them," he said.

The LBMA says the daily notional trade in London in 2016 was $234 billion, far ahead of the Comex in the United States at $28.9 billion or the combined Shanghai futures and gold exchanges at $9.4 billion.

However, the LBMA members provide deep liquidity to the market and this cannot easily be replicated. "Constructing anew such a system would be expensive and wearisome. For Paris to challenge London's pre-eminence the BdF would need to encourage more than just JP Morgan to operate there with such a backup," Norman said.

France's 20th-century reverence for gold had unintended consequences. The country accumulated too much of the world's bullion stock in the 1920s after it returned to the post-Versailles gold standard at an undervalued rate. This exerted a deflationary effect on the international system, deepening the Great Depression. At one point France amassed 5,000 tonnes.

Gold hoarding recoiled with a vengeance in the 1930s when France remained the last major power fixed to the gold standard, and therefore remained trapped in a contractionary vortex that delayed recovery and led to bitter left-right political conflict. It was a key reason why the country succumbed to defeatism in 1940.

London can boast an even more illustrious past than Paris as a bullion hub. It dates back to the gold shipping partnership of the East India Co. and Moses Mocatta in the late 17th century, later helped by the great gold enthusiast Sir Isaac Newton, master of the Royal Mint and part-time alchemist, when he could tear himself away from gravity theory.

The Bank of England established the London Good Delivery List in 1750 to set a unified standard for gold refiners. The quintet of N.M. Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co., and Sharps Wilkins ran the celebrated "London fix" for decades.

The anachronistic fix was reformed after the global financial crisis to make it more transparent. It is now electronic and partially regulated. Barclays was fined $26 million in 2014 for abuses linked to the old system

The Bank of England's gold vaults hold 5,200 tonnes on behalf of global central banks and for the LBMA, with sealed lips on who the customers are. Some 7,500 tonnes in total are stored in London. JP Morgan, HSBC, and Brinks, among others, have their own vaults.

In the long run the real challenge for the London gold market almost certainly comes from Shanghai and Asian hubs. Some might say the sibling rivalry between the French and the British -- over the most atavistic of all commodities -- borders on national caricature.

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