The reason why RBI stores its gold in London

Last week, the RBI announced it had moved 100 metric tonnes of its gold stored in the UK to domestic vaults in FY24. As noted by Business Today, this transfer marks one of India’s largest gold movements since 1991.

Although 100 metric tonnes is a substantial amount, the RBI currently holds 822 metric tonnes of gold. This transfer represents just over 10% of the RBI’s total gold reserves. However, the more concerning aspect is that over 400 metric tonnes of RBI’s gold remain in the UK.

This raises an immediate question: Why? Why keep such a significant portion of gold in the UK, and what good is this gold if it’s stored abroad?

You’re right to wonder. Gold stockpiled in a vault is of little use, taking up space, costing money, and lying dormant. The true potential of gold is realized only when sold. However, selling large quantities of gold (like a few tonnes) presents logistical challenges. Despite gold being universally accepted, transactions involving significant amounts need a transparent, liquid market with numerous buyers and sellers, fairness, competitiveness, and security.

London provides all these conditions. It has the most liquid market for physical gold trading, supported by a robust infrastructure—vaults, specialized transportation, bespoke insurers, and customs handling firms. The Bank of England vault, where RBI stores some of its gold, boasts state-of-the-art security systems including biometric scanners, motion detectors, 24/7 surveillance, and reinforced construction designed to withstand various threats. It is so secure that no gold has ever been stolen from it.

Moreover, the London Bullion Market Association (LBMA) oversees the gold and silver markets in London, ensuring the quality of gold and fair trading practices. Thus, for RBI to store or trade gold globally (exchanging gold for foreign currency, for instance), London remains the best place to do so.

But why not another country with similar infrastructure? Or why can’t India position itself as a global gold trading hub?

There are challenges. London didn’t become the central hub for gold trading overnight. This status evolved over hundreds of years, dating back to the 1600s and the East India Company. Ships loaded with gold and precious metals arrived in London, shaping the gold market from this influx. Refiners, banks, and businesspeople, including the infamous Rothschilds who set up the Royal Mint Refinery in 1852, contributed to this growth during gold rushes from California, Australia, and South Africa. As the capital of the British Empire, London processed, sold, and used most of this gold, further solidifying its position in the global gold market.

By the 20th century, when most countries backed their currency with physical gold, London had already established itself as a global gold trading hub with all necessary infrastructure. They simply maintained their near-monopolistic status, despite the rise of American influence.

So, the question isn’t why RBI stores its gold in London. The real question is why they’re bringing it back now.

The RBI claims there’s no particular reason. However, it might not be keen on holding over 50% of its gold reserves abroad. The US and UK have previously seized Russian gold held in their banks, potentially spooking other countries. If it can happen to Russia, why not India?

Perhaps that’s why the RBI is de-risking. Holding that much gold in London, while convenient for business, may not be the smartest move considering current geopolitical tensions. The RBI has likely decided it’s time to bring some gold back to India.