BANK OF MEXICO BUYS PAPER “GOLD”, SELLS PHYSICAL!

But, what's our gold?

This blog has been following the issue of Bank of Mexico’s reserves (Banxico), since it jumped in 2011 into the scene of those central banks that have acquired large amounts of gold to diversify their reserves. This has been the case at least since 2009, when these institutions became net buyers of the metal.

So, two years ago Banxico bought 100 tons of gold, and in 2012, added 20 more tons. Last February, its total holdings amounted to 124.5 tons, equivalent to just 4% of our international reserves.

However, this position has been reduced in recent months because our central bank has been consistently selling part of its gold for at least nine consecutive months (May 2012 to January 2013).

This wrong decision is compounded by the fact that the gold sold, was part of the very small amount of physical bullion that Mexico had in possession; yes, bars that had been stored in Banxico’s vaults.

Our central bank recognizes this through the document REF.: I22.11.2013, dated March 4th and signed by Sergio Zambrano Herrera, head of the Liaison Unit. It was sent to this journalist in response to an official Request for Information based on the Federal Transparency Law.

The question asked demanded to know where the gold ounces of the reserves were physically located.

Banxico replied that "100% of fine gold sales made ​​in the period covered from May 2012 to December 2012 were conducted within the territory of the United Mexican States."

We should add that in its own Report on International Reserves and Foreign Currency Liquidity, Banxico reports that 4,000 more ounces more were sold in January, and of course we can be sure they were also located within the country. Thus, all these sales mean that we have already lost more than a ton of physical bullion.

To be precise, the Bank of Mexico released about 36,000 ounces of gold in just a matter of months.

We could think this is a very small amount, but it’s nearly a fifth (18.5%) of the only 194,539 oz. that were in the country until April 2012, according to its own figures.

In other words, Banxico purchased 120 tons of paper “gold”, and sold a very important part of the real metal it held. Who and why Banxico took that preposterous decision is an unanswered question.

Banxico's main vault. No gold.

Remember that the 120 tons bought the last two years, were acquired 100% in imaginary form, i.e. the central bank paid for them but never took possession of the bullion. The property just took the form of a paper promise, and Bank of Mexico trusts its gold bars are safely vaulted in foreign hands.

As we now know, the Mexican SuperiorAudit of the Federation  (ASF in Spanish) announced recently that Banxico did not even bother to check if the acquired gold existed at the Bank of England, and gave a stern “recommendation” to conduct physical inspections of that gold in order to be certain of the custody of this asset.

In this sense, our central bank has confirmed also in writing REF.: I22.10.2013, that it has no list containing the serial numbers, purity and weight of its supposed golden bars, and explains that "This is a common practice in international markets. For this reason, the Bank of Mexico has no plans to request the list pointed out in your question." Its blindness is total.

That’s why in this blog we make a strong wake-up call for our country, to demand as soon as possible not just a physical inspection but a total repatriation of our sovereign gold holdings

Yes, that’s not part of the “common practices”, but it’s our right.

We should also stop the gold sales and take advantage of current low prices to reinforce the low caliber of our little gold shield. Money printing (QE) will not stop around the globe, so this correction will not last forever.

Banxico knows it, and that’s one of the reasons it decided to enter into the "currency wars", by cutting its key interest rate to 4% from 4.5% some days ago. So, what are we waiting for Agustin Carstens?

Mexico is experiencing a period of profound reforms and transformations, which undoubtedly encourage optimism that things will be better in the future on issues such as economic growth and fiscal sustainability. Now even Standard & Poor's has revised the outlook on our long-term sovereign credit ratings from "stable" to "positive", and the government is happy.

Nevertheless, we cannot believe that we will be immune to the next great crisis, when the house of cards of the so-called economic recovery collapses. Only then we will comprehend the indisputable role of gold in the international monetary system, and we will only be better off if the Mexican gold is in fact within our borders. The clock is ticking Mr. Carstens.