Rocky Vega

We recently reported the Bank for International Settlements (BIS) has been accepting gold like a “pawn shop” for central banks, but the BIS has since changed its tune. It emailed The Wall Street Journal to say the 346 tonnes of gold it has added to its vaults belong to commercial banks and not to central banks. Sure, anything’s possible… yet this version of events seems unlikely, and we’ll explain why below.

For reference, the gold holdings-related content in question comes from page 171 of the June 2010 BIS Annual Report:

“Included in ‘Gold bars held at central banks’ is SDR 8,160.1 million (346 tonnes) (2009: nil) of gold, which the Bank held in connection with gold swap operations, under which the Bank exchanges currencies for physical gold. The Bank has an obligation to return the gold at the end of the contract.”

This was initially interpreted by The Wall Street Journal as reflecting an increase in gold swaps from central banks looking for cash. However, the WSJ has since corrected itself to say it reflects only gold loaned to the BIS by commercial banks, and not central banks.

Today, an interesting potential explanation for the updated phrasing was offered up by gold forecaster Julian Phillips. From GoldSeek.com:

“The Wall Street Journal informs us that the B.I.S. did these swaps with commercial banks. We know of no commercial bank that has 382 tonnes of gold on their books. It is likely then that should these commercial banks have been in the deal, they would have been acting for a central bank [or several over time] who wished to remain anonymous.”

Phillips provides one of the more palatable explanations for the BIS’ language update. Commercial banks are largely dependent on income-generating assets and securities, and it doesn’t make much sense for them to hold actual physical gold. Further, it does seem logical that a central bank “pawning” its gold would want to make the chain of custody as murky as possible, and involving a commercial bank is a sensible enough way of achieving that end.

If it is true — that central banks are still behind this “biggest gold swap in history” — what’s the significance of the transaction?

Here’s Phillips’ take:

“What is significant about this or these transactions is that gold is being used in international settlements after so many decades of being sidelined in the monetary system! The transaction itself confirms that gold is being used in international settlements, which is a dynamic confirmation of gold’s return to the monetary system.

“A ‘Swap’ might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the B.I.S. would have to decide either to keep the gold on its books or to sell it. Again, keeping it on its books is part confirmation that gold is active again on the monetary system, a big boost by itself! Gold is back and alive in the monetary system!”

Phillips sees this use of gold in international transactions as being even more important than recent increases in gold net purchasing by central banks. Not only are central banks adding to their stores of the yellow metal, but they are also putting the asset to work as a financial instrument.

This story is bound to develop further, and we’ll be here to report back as to exactly which shell this golden “pea” crawled out from under.

You can also read more details in GoldSeek.com coverage of why gold is back as money.

Best,

Rocky Vega,
The Daily Reckoning

You May Also Like:


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

Rocky Vega

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 […]

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.

  • Ali Baba

    For God’s sake, somebody, enybody, any living been, sow those 349 tons of gold?!!!!….
    Because if NOT!!!!!
    That’s just another (sooner failed ) attempt to supress the gold price…
    They just become desperate…
    And China is not helping…
    Got the point?…

Recent Articles

Disruptive Innovation Will Change How You View Obamacare

Greg Beato

The Affordable Care Act dumped 2,000 pages of regulations into the health care sector, stifling any innovation that could have brought about real cost savings. But even with these obstacles, there are still people looking for ways to do things better and at a lower cost. These new technologies could be the key to fixing health care in America...


Why Old-School Tech Stocks Are Beating Social Media

Greg Guenthner

While many of the newer social media stocks struggle for gains this year, old-school tech stocks have become some of the best trades on the market. With the rare exception (Facebook is doing well—shares are up 26% year-to-date) the social stocks are in the gutter. They got off to a fast start in January and Februray, but ran out of steam in the spring. Aside from a few feeble attempts, few have posted anything close to a noteworthy comeback. Twitter, LinkedIn, and Groupon are all down double-digits year-to-date. Groupon—the worst performer on this short list—is down 47%. On the other had, the biggest of the big tech stocks on the market are helping traders pile up even larger gains right now. Greg Guenthner explains…


Video
Creditism and the Threat of a New Depression

Richard Duncan

In the 1960s, total credit in the U.S. broke the one trillion dollar mark...and since then, it has expanded over 50 times. But now, as Richard Duncan explains, the explosion of credit that's made America prosperous, threatens to take the entire economy down. And that could mean the return of another depression...


Advance Notice of the Next Market Crash

Chris Mayer

News flash: The future is uncertain. (Gasp!) But given this uncertainty how are you supposed to invest successfully? It would be nice to ride stocks on the way up... and bow out before the crash... but few are able to do it without sheer luck. Chris Mayer, searching for a successful method, looks back to the 1929 market crash for clues...


5 Min. Forecast
What Your Grocery Bill Says About Your Investment Future

Dave Gonigam

Despite rapidly rising food prices, American households still spend relatively little on groceries. And while plenty of factors contribute to lower food costs in the US, that can lead to serious competition... and that means a good investment opportunity is right around the corner. Dave Gonigam explores...


A New Bank that Challenges the US Dollar’s Reserve Status

Liam Halligan

As owner of the world's reserve currency, the US has enjoyed a cushy spot in the global economy. But with the rise of a group of rival countries the dollar's reserve status is under attack. And if it somehow gets knocked off its perch, the effects throughout the world (and in the US in particular) would be disastrous. Liam Halligan explains...