Global “Pawn Shop” Loans Central Banks Cash for Gold at Record Rate

The gold price level has pulled back of late and there’s a new reason to explain the move. Commodity Online suggests the price of gold could be taking a hit from the record rate at which the Bank for International Settlements (BIS) has been growing its holdings of central bank gold. The BIS has the ability to serve as a sort of global “pawn shop” for central bank gold and could be in the process of executing “the biggest gold swap in history.”

The BIS is known as “the central bank for central banks,” and as such coordinates the financial cooperation of its 57 member countries. Not surprisingly, its board includes central bank heads like Ben Bernanke, Jean-Claude Trichet, Mervyn King, and others.

The latest reports indicate that the BIS has taken in 349 tonnes of gold since December, worth about $14 billion, which it has then loaned out to central banks as cash.

According to Commodity Online:

“Now it has come to the light that several central banks, which had increased their gold reserves, have pawned their gold with Bank for International Settlements at a record rate, taking advantage of the precious metal’s historically high value to raise cash.

“It is not clear whether India’s Reserve Bank [RBI] has pawned its gold with the BIS but many banks have already done it. According to reports appeared in Wall Street Journal and Financial Express, a report released last week by the BIS shows the international agency has taken 349 tonnes of gold since December — allowing central banks to raise a record $14 billion.

“The number surprised the market, which had assumed most central banks had retained their holdings of gold. Instead, the BIS data show that they have been entering these gold swaps — exchanging their gold with the BIS in return for cash, agreeing to repurchase the gold at a later date. The RBI also may have pawned its gold for cash as it has become a normal practice this year.

“The increase in the use of gold swaps is particularly surprising because central banks have rarely used them for decades, and the amount of gold at the BIS has remained stable for years.”

The article indicates that gold swaps, because they are loans, should not singlehandedly depress the price of gold. However, there is a psychological impact on the market. Recently, central banks have been net buyers of gold, but, rather than simply holding it in vaults as expected, some are promptly exchanging it for cash.

A main problem is that in the event central banks are unable to make good on their cash loans the gold can be “seized and sold on the open market by the BIS.” That could create a situation where investors suddenly see an unanticipated glut of gold and a subsequently depressed gold value.

We’ll watch to see if this trend continues. You can read more details in Commodity Online’s coverage of central bank gold with the BIS.


Rocky Vega,
The Daily Reckoning