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.
The Daily Reckoning
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.
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?…
"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...
The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.
The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”
Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...
The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.
It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.