The Wall Street Journal

reports that in the back of a 216 pages long BIS (Bank for International Settlements) report, a little note was buried about gold swaps to the tune of 349 metric tonnes. Apparently some central banks in the euro area (although they are not identified in the report) have swapped their gold for ready cash of $14 billion for reasons unknown, but likely connected to the sovereign debt crisis in Europe.

 

Not surprisingly, the WSJ is ready with giving us a bearish spin on this event:

 

“While the use of swaps has no practical implications for the gold market, the report helped weigh on gold prices, which have already come under pressure since reaching a peak last month.  The prospect that the gold isn't locked up in central-bank vaults as investors thought — and that it may, in an extreme case, be seized and sold on the open market by the BIS — gave some investors pause.”

 

These 'investors' that are now on 'pause' (some of whom are quoted in the report) evidently haven't thought this event properly through. First of all, 350 tons of gold is so little in terms of the gold market's overall size that it matters about as much as the IMF's 400 ton sale: namely somewhere between not at all and not much. Secondly, the idea that the BIS will 'seize' the gold, and in the highly unlikely event of such a seizure be eager to exchange it for more paper with ink slapped on it is somewhat dubious by itself. As Philip Klapwijk of the GFMS (Gold Fields Mineral Services) sagely remarks in the WSJ report:

 

“The sharp increase in January, when most of the borrowing took place, coincides with a flare-up in worries about a sovereign-debt crisis in Greece spreading throughout Europe. At that time, borrowing costs soared and liquidity tightened. Some central banks may have begun to fret, and chose to turn some of their holdings to cash as a standby, said Philip Klapwijk, executive chairman of GFMS Ltd., a London-based metals consultant.  "It suggests a bit of a last-resort measure," Mr. Klapwijk said.

 


 

caption: 'Gold held by the BIS'
source: Wall Street Journal
 

 

Last resort measures by central banks to scrape together some funds don't exactly strike us a gold bearish development, per se. It appears to us rather that the exact opposite inference makes a lot more sense. In the meantime GATA (the Gold Anti Trust Action committee) has of course picked this story up and commented on it. As always, it suspects a nefarious purpose in connection with an attempt to influence gold prices. However, how is that supposed to work if the gold is merely swapped? In all likelihood it never left the vault it is in. Now, we agree with GATA that the secrecy surrounding the swaps agreement (it all happened very quietly and unannounced, and if not for some hardy soul studying the BIS report in detail, we'd never have heard about it) is suspicious. However, we think what the secrecy is about is to keep the market from finding out which country's central bank exactly thinks the situation is so dire that it needs to swap out its gold.

Chris Powell says, inter alia:

 

“[…] while news reports describe the BIS gold swaps as a means for central banks to "raise cash," central banks are able to create money out of nothing; they don't have to sell or lend anything to create money, or at least not to create their own money. They might have to sell or lend something to obtain the currency of some other nation. For example, other nations might have to sell or lend gold to obtain U.S. dollars.  But, third, the U.S. Federal Reserve lately has made all sorts of currency swap arrangements with other central banks so that they all can have plenty of dollars to use for market intervention. Other central banks have been able to obtain plenty of dollars just by creating more of their own currency and exchanging it with the Fed. In effect all the major Western central banks now are able to create dollars at will. So why did any central bank have to lend or pawn its gold to get dollars?

 

Allow us to point out here that one of the problems the governments and national central banks of the euro area face is precisely that the can not just 'print up their own money' anymore. However, there are now more interesting speculations making the rounds as to who might be the swapper. After all, while euro-system central banks are allowed to engage in such transactions with the BIS, they are definitely not allowed to then transfer the money so acquired to their national governments. An interesting idea is that it may well be once again the IMF that is engaging in this exercise. As we know, the IMF is in the process of denuding itself of 'surplus gold' in order to be able to finance various crisis-induced bail-outs around the globe. So it could well be a 'bridging loan' as speculated at Alphaville. By the way, it is not true that the IMF has 'trouble finding buyers' for its remaining gold. It merely doesn't want to sell to anyone outside 'official circles' or approved as an intermediary by the IMF. After all, when Eric Sprott offered to buy its remaining gold, it flat out said 'no'. All in all we think this story about the swaps is much ado about nothing, at least as far as the gold market is concerned. The swapped gold will likely never reach the market.

 


 

Gold bars – consider us swapped … but not sold. The glittering money of the free market, recently helping out central banks in extremis.

(Photo credit: Wikimedia commons)

 

 


 

 

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