Monday, July 12, 2010

More Detail On The BIS Gold Swap

During the July 6th and 7th overnight session, the gold market was spooked by an obscure footnote in the Bank of International Settlements' annual report disclosing an unusually large gold swap. Originally believed to be a central bank on the other end, speculation later settled on the IMF: Edel Tully pointed out the most likely central bank in such a swap arrangement (Portugal, Greece, Spain) would have had only restricted use of the cash. Later, the BIS disclosed that the swap has been done with a commercial bank, which made the story murkier.
It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.

In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority.

This would add an extra layer of anonymity. "So the BIS swaps look like a tripartite transaction," writes Adrian Douglas of the Gold Anti-Trust Association. "The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS."

Analysts for Commerzbank note that in the meantime, "The price of gold is tending weaker at present."

The BIS is supposed to be a central bankers' central bank, so they undertaking a swap arrangement with a commercial bank would be unusual. Since the repurchase part of the swap would be done with a price agreed upon beforehand, the couterparty evidently: a) expects gold to rise further, b) has borrowed the gold to meet commitments for physical delivery, or c) needed the cash.

The BIS' fiscal year ends March 31st, before the Eurocrisis exploded. Since the arrangement was made before that date, a PIIGS central bank would not have had restricted use of the funds; it was pre-bailout.

So, I present this guess: given the Grecian government's proclivity for using private parties already, I suggest it was the central bank of Greece acting through a proxy. In that case, the gold has probably been sold already.

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