French Central Bank And JP Morgan Team Up To Boost Gold Lending

The central bank gold lending market, centered in London, is probably the most secretive financial market in the world, with very little known about its transactions and market structure.

The gold lending market’s opacity is further supported by regulators who protect the secrecy of the central banks, and mainstream financial news agencies whose editorial policies seem to forbid any market investigations, in-depth or otherwise.

It is in the gold lending market that the central banks of the world lend out their gold holdings to commercial bullion banks, where the physical gold is sold and shipped out, and where the central banks then claim to hold interest-earning ‘gold deposits’ with the bullion banks. These gold-deposits (which are merely a claim on a bullion bank) then mostly roll over short-term, passed around indefinitely between the clubby LBMA cartel of bullion banks, in a totally opaque behind the scenes network.

The physical gold bars lent out are long gone to Switzerland and the Far East, and the central banks then deceptively claim that they still hold the gold on their balance sheets (due to an IMF accounting trick) when in fact all they have is a liability to the bullion banks. In the middle of this market sits the Bank of England, offering gold custody and storage to other central banks (in the vaults under the Bank of England headquarters in London) and offering gold accounts to the bullion banks concerned.

Look for gold lending market documentation on the London Bullion Market Association (LBMA) website and you won’t find it. Search for documentation and reports on the websites of the bullion banks, ditto. Talk to ex-traders who have worked in the gold lending area and they say they can’t talk about it. Ask the Bank of England and Bank of International Settlements (BIS) to explain how the gold lending market works and they characteristically go silent or answer a different question.

Within the myriad of central bank websites and reports around the world, there are a few glimpses into the gold lending market, such as a smattering of reports from some South American central banks, but these are the exceptions rather than the rule, the rule being utter secrecy to reveal anything about the extent to which gold is lent out and stays lent out i.e. the true size of outstanding central bank lent gold positions.

It is into this murky world of opacity and ‘no comment’ that the Banque of France claims to have recently entered with the aid of one of the giants of bullion banking, JP Morgan. How recently is the question, because the Banque de France was already known to be active in the gold lending market since at least 2013.

Gold Services – Active in the Gold Market

The first revelations of a Banque de France – JP Morgan tie-up came in an LBMA magazine article during October (Issue 91 The Alchemist) when the second deputy governor of the Banque de France, Sylvie Goulard, mentioned in an article that the French central bank is now facilitating access for other central banks to the gold lending market in a service its offering in conjunction with US-headquartered commercial bullion bank.

In her article, Goulard explained that in 2012, the Banque de France “began to extend its range of gold services” to central bank reserve asset managers, and as well as offering other central banks the services of gold custody (vault storage), it started offering gold transaction (buy and sell) services, gold for fiat swaps (for financing and collateral), and gold lending transactions for its central bank clients:

It [the Banque] can also offer gold swaps either for the purpose of using gold as collateral for deposits… or for the purpose of raising foreign currency cash against gold.

Finally, foreign central banks can engage in gold lease transactions with the Banque de France as principal, in order to increase the return on their gold holdings without increasing their counterparty risk. Demand for gold deposits for maturities from one week to one year picked up when interest rates went below zero for a number of reserve currencies, thereby prompting central banks to look for alternative sources of return.

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Note: For a full overview of the Banque de France’s involvement with gold, see BullionStar’s Gold University article “ more

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