The Mexican Standoff: Gold, Banxico And The BoE
The Real Asset Company | Mar 06, 2013 12:28PM ET
Late last month it was reported that Mexico plans to audit its gold stored with the Bank of England.
Financial journalist Guillermo Barba, wrote that that the Mexican Superior Audit of the Federation (“ASF” in Spanish) has made an official ‘recommendation’ that the Bank of Mexico should make a physical inspection with the counterparty that has the gold under its custody, in order to be able to verify and validate its physical wholeness and the compliance with the terms and conditions of dealing with this Asset… It was verified by the ASF that this has never been done by Banxico.
It turns out the Banxico isn't even that sure how many gold bars it owns.
Barba’s concern, along with many other individuals and countries, is that the gold may not even be there. In documents received by Barba, from Banxico, reference is made to the London Bullion Market Association which he finds ‘disquieting.’ This is of course down to the fractional reserve system which large bullion banks operate on. This can, of course, only survive if the countries don’t come running for their gold at the same time.
The gold stored at the Bank of England came under (weak) media scrutiny at the beginning of the year when Germany announced that it would be bringing back some of its gold, not from the Bank of England, but from Banque de France and the Federal Reserve.
At the time many speculated that the gold held at the Bank of England was not being returned to Germany as storage was not being charged for and it ‘made economic sense’. In case anyone was in any doubt as to the existence of the gold the Queen of England was rolled out for a photo-op, just to reassure any doubters around the world.
It’s clear that Queen Elizabeth II’s visit did not do enough to put the Mexicans’ minds at rest.
The news of Germany’s repatriation, and now Mexico’s audit request should not be big news.
The fact that it is news shows what idiots central bankers have been. These various central banks are now thinking maybe they should have paid better attention to the quality, location or even existence of the gold.
Gold Bullion Storage On Threadneedle Street
Historically it seems a gentleman’s agreement has been enough to guarantee the existence of your gold in another central bank.
Mexico has, according to official figures, 125 tonnes of gold bullion, 95% of which is held abroad and 99% of this is held on Threadneedle Street. The gold represents a mere 4% of Mexico’s reserves, and works out at just over 1.12g per capita.
Mexico doesn’t just hold gold abroad it’s also increasing in the production stakes. While silver is the country’s mining cash cow, Mexico is also the world’s tenth largest producer of gold. By 2014, the World Gold Council (WGC) estimate it will be producing approximately 75 tonnes a year -- an 80% increase in production since 2007. Between 2010 and 2011 gold production increased by 22% meaning Mexico had the world’s highest growth rate in terms of production. At present gold production only accounts for 0.38% of GDP.
Get The News You Want
Back in 2011, the country made headlines when they bought nearly 100 tonnes of gold between the February and March. At the time it was, and remains, one of the largest single, monthly purchases by a central bank in recent history.
The Bank of Mexico indicated that the decision to invest in gold was as part of a decision to divest the country’s reserves which had rapidly expanded from approximately $75 billion to $120 billion between Q1 2007 and Q1 2011.
Buying up gold reserves is one thing, it is often explained away by it being good practice to diversify the country’s reserves. But nowadays increasing numbers of people see that as showing a concern for currencies -- whether your own or the dollar.
But to ask for an audit or to repatriate it makes it almost personal that one country to another doesn’t have any trust.
What’s made the Mexican ASF decide now is the right time to start asking questions about their gold?
Along with all other fiat currencies across the world, the Mexican peso is rapidly losing value. But not a significant amount more than the British Pound.
As we wrote a while back, in The Real Asset Company .
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