Brazil Gold Reserves In Fixed Term Gold Deposits With Bullion Banks

Today’s AM fix was USD 1,734.75, EUR 1,345.39, and GBP 1,088.37 per ounce. 
Yesterday’s AM fix was USD 1,729.75, EUR 1,344.23, and GBP 1,084.35 per ounce.

Silver is trading at $33.43/oz, €26.02/oz and £21.07/oz. Platinum is trading at $1,583.00/oz, palladium at $654.70/oz and rhodium at $1,040/oz.

Cross Currency Table – (Bloomberg)

Yesterday New York was closed for the American holiday of Thanksgiving.  Today trading finishes at noon. With very little data today, trading is expected to be relatively quiet ahead of the weekend after yesterday’s Thanksgiving holiday.

Gold inched up on Friday, set for its 2nd week of gains, as the euro strengthened on news of advancement in Greece’s bailout talks while the looming US fiscal cliff continues to support bullion.

Stock markets are down a touch and oil prices are edging lower due to the ceasefire in the Gaza strip and demand destruction concerns.

Greece’s lenders have finalized new means to trim its debt burden but still need to fill a $12.9 billion gap to receive the approval of the IMF said a senior Greek official.

Central bank buying, the US fiscal cliff and continuous loose money policies from nations around the globe all cement the yellow metal’s appeal as a hedge against inflation. 

Gold is nearing some key chart levels and these were commented upon by UBS this morning and noted by Reuters.

“Gold is just a few dollars shy of its 50-day moving average sitting at $1741, and more importantly, a key technical level lurking at $1739.10,” it said.

“Our technical strategist notes that a break above this level, which is the month’s high, would be a crucial bullish development that would open up $1748.95, the 62% retracement of the October/November sell-off ahead of $1794.80, the October high.” 

“The yellow metal seems on the verge of a break higher,” the bullion bank added. “But with trading for what’s left of the week expected to extend yesterday’s quiet $5-range, market participants may have to wait until after the weekend to see some action. The advantage of this is that investors still have the day ahead to position for what may be an exciting week in store for them.”

Currency Ranked Returns G10 & Precious Metals in Brazilian Real – (Bloomberg)

The IMF reported Wednesday that the Banco Central do Brasil has increased its gold holdings for the second straight month, to the highest level in 11 years, as Latin America’s biggest economy looks to diversify its vast international reserves.

Brazil’s aggressive efforts to weaken its currency by buying dollars – about $132 billion since the beginning of 2008 – have left the country with the sixth biggest international reserves in the world, about 80% of which is denominated in the US currency.

However, recent turmoil in currency markets and concerns over the global financial crisis and fiat currencies in general has given Brazil’s authorities even more reason to diversify their holdings. 

It has frequently stated its intention to diversify assets and reduce its exposure to currency risk.

Recent sharp weakness in Brazil’s real (see table) and systemic risks are leading central banks, including the BCB to diversify into gold.

Brazil raised its gold holdings by 17.2 tonnes in October to 52.5 tonnes, the highest level since January 2001. The move comes on the back of Brazil’s 1.7 tonne increase in September, the country’s first significant gold purchase in a decade.

In December last year, 83.5% cent of the central bank’s $352 billion reserves was held in increasingly risky government bonds, 15.6% was in other bonds and bank deposits while only 0.8% of reserves was held in other asset classes such as gold.

In its international reserves report in June, the central bank said the recent surge in reserves had allowed the country to hedge its external liabilities, allowing it to now “seek a greater diversification of international reserves.”

However, there are concerns that the increase in the Brazilian central bank gold holdings’ and tonnage are not all that they seem.  It appears that the central bank in Brazil has not actually bought London Good Delivery bullion bars but rather fixed term gold deposits with bullion banks.

Recently, the Brazilian central bank was asked about their gold reserves and about a section on gold on their website under ‘Official Reserve Assets’ lists gold as “gold (including gold deposit and, if appropriate, gold swapped)” with a footnote of “Includes available stock of financial gold plus time deposits.”

Although Brazil’s central bank declined to comment on the reason behind its recent return to gold purchases,  the Banco Central do Brasil confirmed that the gold included in Reserve Assets comprises fixed term gold deposits at commercial banks only.

XAU/BRL Exchange Rate, Monthly – (Bloomberg)

Therefore, rather than being outright owners of their national patrimony either in their own vaults in Brazil or in the vaults of other central banks, some of the Brazilian gold reserves may be a claim on gold deposits held with bullion banks .

This would be unusual and poses increased counter party risk for the Banco Central do Brasil and the Brazilian currency reserves.