Secret Gold Swap Has Spooked Market


"News that a mystery bank pawned the family jewels gave traders a jolt."

Last week, when news of one or more banks lending 380 tons of gold to the Bank of International Settlements in return for foreign currencies there was widespread surprise and confusion.

News that a mystery bank had just pawned the family jewels gave traders a jolt—nervous about the sudden transfer of ~20% of the world's annual gold production and the possibility of a selloff.

In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold—compared with nothing the year before. The disclosure was a large factor in the gold price correction this week, which fell below $1,200 for the first time in more than a month.

Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. It appears to have raised $14bn for whoever's been doing the swapping—small fry on the currency markets, but serious liquidity in the gold market.

Central banks (CBs) in the troubled southern zone of Europe were considered the most likely perpetrators.

According to the WGC, CBs in Greece, Spain and Portugal held 112.2, 281.6 and 382.5 tons of gold, respectively in June—leading analysts to point fingers at Portugal, or a combination of the three.

But UBS' Edel Tully noted that eurozone CBs would be severely limited with influx of extra cash—unable to transfer it straight to governments or use the primary bond markets.

Gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favorable rate of interest paid for the foreign currency.

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