Thursday, July 15, 2010

BIS Gold Swap Bullish, Argues

The gold market was spooked by the revelation of the BIS's gold swap, but a writer for argues it's good news for the gold market.
Rather than being negative for gold, the news is positive. Firstly, investors have never regarded central banks as strong hands for gold. Second, it confirms that gold is the money of last resort since banks were forced to surrender their metal in order to satisfy near-term cash requirements that could not be satisfied through the printing press and discount window.

Third, the gold was swapped rather than sold. Whilst the metal could make its way to the market, it is literally inconceivable. Were that to happen, the circumstances would be bullish for bullion because it would signal that the swap originators had expended their resources and were essentially in default. That would result in a profound shock to financial assets seen in spiking credit default swaps and additional pressure on embattled sovereign instruments....

In other words, gold is being used as a useful financial asset. In this sense, denigrating gold for being 'uselessly' stored and shuffled from one end of the vault to another is not unlike denigrating derivatives as 'paper shuffing' given that derivates are used to hedge.

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