Wednesday, July 7, 2010

Central banks Swap Gold For Cash In Record Numbers

The gold market got the jitters overnight from a report that central banks have been swapping their gold for cash with the Bank for International Settlements (BIS), agreeing to repurchase the gold later. Those transactions, more like pawning than sales, shouldn't affect the gold market but could if any central bank defaults on their repurchase commitment. In that case, the BIS might sell the pledged gold to get its money back.

A Wall Street Journal report goes into the mechanics of the swaps and explains why the possibility of the BIS selling any of the gold is far-fetched. Still, the swaps put some doubt on the newfound theme of central banks buying gold. Interestingly, those swaps ramped up back in January before the Eurocrisis flared up. The central banks entering into those agreements might have been swayed by the December decline and partial recovery in January - or they could have done so because they saw trouble coming.

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