07/30/10 Alexandria, Virgina — Not one to let a sleeping dog lie, today we’ve encountered a new explanation for the mysterious Bank of International Settlements’ 380 tonnes in gold swap operations. Before this week, James Turk, co-author of The Collapse of the Dollar, had yet to voice a theory on the swap. However, after learning Portugal is taking an unusual step (as a sovereign borrower) — of setting aside assets as collateral against derivative transactions in order to bring down its funding costs — Turk couldn’t resist sharing his hunch.
From the Kitco Commentator’s Corner:
“It has long been recognized that Portugal is active in the gold market. It had loaned gold to Drexel Burnham in the 1980s [...] So it is not farfetched to assume that Portugal had loaned its remaining gold to a commercial bank, which meant that Portugal was exposed to the credit risk of this bank.
“Now consider for a moment, what if that gold loan had been made by Portugal to Citibank or some other zombie bank? It wouldn’t look very good on Portugal’s balance sheet to be owed 380 tonnes of gold by a near-bankrupt institution. Given that Portugal is taking steps to ‘to reduce its funding costs’ as the FT reports, it would be logical for it to get rid of that gold loan.
“The best choice of course would be to demand repayment of the loan and put the 380 tonnes of gold back in its vault. That action though would drive the gold price sky-high, given the dearth of sellers of physical metal at current prices. Sky-high prices would blow-up the gold cartel and its efforts to continue capping the gold price as it operates its staged retreat, letting gold rise every year but not too much so as to not draw everyone’s attention to it and the resulting consequences of ever-depreciating fiat currencies. So enter the BIS.
“It swaps currency for the gold loan at the commercial bank. In other words, the 380 tonnes of gold is now owed to Portugal by the BIS, improving considerably the quality of Portugal’s balance sheet. After all, who would you rather have owing gold to you? Some commercial bank like Citibank or central banks’ own central bank, the BIS? Clearly, being owed gold by the BIS instead of a zombie bank would be one way for Portugal to ‘reduce its funding costs’ by improving the quality of its balance sheet.”
At this point, there are now more than a few BIS theories to go around. If you’re interested in another, one from Gordon Long is available from Safehaven, here. It offers a longer and more detailed account of why the gold swap likely took place with Portugal, and ultimately the explanation includes a theory that gold market manipulation is making it more possible for SDRs to replace dollars as the world’s reserve currency… if that sort of conjecture is your cup of tea. It’s at least an interesting read.
This latest theory came to our attention via a Kitco Commentator’s Corner post on deciphering the BIS gold swap.
Best,
Rocky Vega,
The Daily Reckoning
Rocky Vega
Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let’s Go Publications, Harvard Student Agencies, and The Harvard Advocate.
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Fresh update on the BIS gold swap from GATA and the FT here:
http://gata.org/node/8876
Don’t miss its conclusion
The World Gold Council. “Founded in 1987, the World Gold Council is an organization formed and funded by the world’s leading gold mining companies with the aim of stimulating and maximizing the demand for, and holding of Gold.” So this council is something like OPEC, and whose main function is to get gold prices as high as they can so they can all ride around in Rolls Royces and the hell with the fools that believe that the price and production of gold is not manipulated.
This is just another greedy capitalist house of cards.
As more and fuel is added coupled with the increasing paper volume, it is not at all likely that gold will remain buried.