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Gold swaps and Bank of England's custodial gold inventory decline

Section: Daily Dispatches

A little more journalism would ask the New York Fed about any changes in its own custodial gold inventory -- not that any answer would necessarily be truthful.

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Central Banks Move Gold Back Home After Freeze on Russian Assets

By Arjun Neil Alim and Harry Dempsey
Financial Times, London
Monday, July 10, 2023

A growing number of countries are bringing their physical gold reserves back home to avoid Russian-style sanctions on their foreign assets, while increasing their purchases of the precious metal as a hedge against high levels of inflation.

Central banks globally made record purchases of gold in 2022 and into the first quarter of this year, as they hunted for safe havens from high inflation and volatile bond prices, according to a survey of sovereign investors by asset manager Invesco. China and Turkey together accounted for almost one-fifth of these purchases.

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Concerned by the decision by the US and others to freeze Russian assets, central banks opted to buy physical gold rather than derivatives or exchange traded funds that track the metal's price.

They also preferred to hold it in their own country as global tensions increased. Invesco's survey found that 68% of central banks held part of their gold reserves domestically, up from 50% in 2020. In five years that figure is expected to rise to 74%, the survey showed.

"Until this year central banks were willing to buy or sell gold through ETFs and gold swaps," said Invesco's head of official institutions, Rod Ringrow. "This year it has been much more physical gold and the desire to hold gold in country rather than overseas with other central banks.  ... It's part of the reaction to the freezing of the Bank of Russia's reserves." ...

In a sign of the move to repatriate gold, holdings at the Bank of England, one of the main storage hubs for official financial institutions globally, have slipped 12% from their 2021 peak to 164 million troy ounces at the start of June.

The attraction of holding gold in large liquid hubs such as London has also been reduced by the fact that hedging by gold miners peaked at the turn of the millennium and has since fallen. That has limited the ability for central banks to earn a yield by swapping out bullion stored overseas.

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