Central Bank Deposits Gold Abroad

The Central Bank is making use of its gold reserves.

In May, the bank deposited $400 million of its gold abroad, turning it into the equivalent of currency reserves, according to the rules of the International Monetary Fund.

According to the Central Bank, as of May 1, its currency and gold reserves totaled $39.1 billion, of which $4.1 billion, or 10.55 percent, was in gold. One month later, the reserves grew to $42.2 billion, of which just $3.7 billion, or 8.8 percent, was gold.

A source close to the Central Bank said about 40 tons of gold were deposited into Western bank accounts during that time.

The source said a large part of the gold reserves is held by Gokhran, the state precious metals and precious stones reserve, which charges a fee for storing it. The remainder is kept in the West, either in current accounts or gold deposit accounts. The interest on such accounts is paid in gold and at much higher rates than regular deposits. The State Bank of India, for example, pays 3 percent a year for three-year gold deposits and 4 percent for seven-year deposits, which is about 1 percent to 1.5 percent more than most Western banks pay.

Analysts were unable to rate the effectiveness of the Central Bank's decision because it is difficult to forecast what gold prices will be when the deposits are returned. In May, for example, gold prices in London reached a five-year high of $327.5 an ounce and then began to fall. Last week, an ounce was worth $319.

NIKoil analyst Vladimir Tikhomirov said the market has been affected by recent announcements by large Western gold-mining companies that they would cut production and by major European banks that they would stop selling gold from their reserves.

Rosbank vice president Pavel Loginov said any attempt by the Central Bank to sell 40 tons of gold could have crashed an already fragile market. "The amount to be sold isn't even the issue; the moment a central bank [of any country] starts selling gold, the market reacts immediately and prices fall," he said.

The source said the Central Bank would still earn a healthy profit by parking its gold abroad because, at 2 percent a year, the bank will have earned an additional 400 kilograms of gold in half a year.

Additionally, the Central Bank has repeatedly said its top goal is diversification, not profit. Either way, the Central Bank is not likely to worry over falling gold prices, because it will earn interest no matter what happens.