The Central Bank Gold "Shell Game" Continues

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

“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 coverage of why gold is back as money.


Rocky Vega,
The Daily Reckoning