Monday, July 12, 2010

Secret Gold Swap Between BIS and Commercial Banks

People noticed something strange had been going on when they saw a footnote entry of 380 tonnes of gold in the annual report of B.I.S., Bank of International Settlements - the central bank for the world's central banks.

The news has been floating around in gold circles since last week.

UK's Telegraph reports:

"It takes a lot to spook the solid old gold market. But when it emerged last week that one or more banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies, there was widespread surprise and confusion.

"The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world's annual gold production and the possibility of a sell-off.

"In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold, compared with nothing the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month.

"Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. It appears to have raised $14bn for whoever's been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market." [The article continues.]

The transaction looks like a tripartite one, involving BIS, IMF, and commercial (bullion) banks, whose names include the usual suspects who have wrecked havoc in the global financial markets in the past two years - Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale.

The Telegraph article, citing a gold expert, says it is just a "swap" and not a "lease", and therefore gold is not going to be released into the market.

I'm not so sure. Instead of sitting on the gold for the duration of the swap, BIS could make good use of the gold by leasing it to commercial bullion banks earning additional interest, and the bullion banks would sell it in the market for higher-yielding debt instruments.

Why now?

Jesse's Café Américain says and I agree:

"I think the answer can be found in the setup of the market. Gold was knocking on the door of resistance at $1260, a key point that could have triggered a break away rally. At the same time, according to figures provided in his daily Comex commentary, there were an extraordinary number of contracts standing for delivery in silver and especially gold. Indeed, if the numbers are correct, a breakaway rally would have encouraged almost 2 million ounces of gold to be demanded of the Comex, a call on their 2.64 million ounces of dealer supply that could have literally 'broken the bank.'

"As Volcker and Greenspan have both said, the central banks must stand ready to sell gold into the market to prevent its price from rising and displacing the confidence of the markets in the power of the central banks to manage their currency markets."

It looks like gold selling continues this week. Gold is again below $1,200, down $13.


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