More Rampant BIS Gold Swap Speculation

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

The Daily Reckoning