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The
latest twist in the gold swap saga of the Bank for International Settlements
is intriguing, as indicated by last night's GATA Dispatch, "Gold Swap
Mystery Deepens as BIS Gets Correction from Wall Street Journal":
http://www.gata.org/node/8799
As
always, news of anything to do with the gold market is cloaked in secrecy,
misinformation, and innuendo.
What
we can be sure of is that the BIS news is gold-friendly.
Why?
Because
the BIS was intending to keep the matter secret.
The
BIS gold swaps were not announced but instead "discovered" by an
analyst snooping around the BIS accounts.
Similarly
the International Monetary Fund has been quietly selling gold each month since
February even though for years every possibility of a gold sale by the IMF
was announced X to the power N times, where X is the number of tonnes to be
sold and N is the gold price.
The
BIS typically transacts with central banks but not exclusively; the BIS' own
profile also mentions a "number of international institutions" with
which it does business, which includes undoubtedly commercial banks and
bullion banks, which are also commercial banks.
The
BIS is always active in the gold market, so it cannot just transact with
central banks, as the central banks need someone to make trades for them:
http://www.bis.org/about/profile.pdf
"The
BIS offers a wide range of financial services specifically designed to assist
central banks and other monetary authorities in the management of their
foreign exchange reserves. As of 31 March 2010 some 130 such authorities, as
well as a number of international institutions, made use of BIS financial
services. Total currency deposits amounted to SDR 196 billion, representing
around 3 percent of world foreign exchange reserves."
If the
BIS were to trade directly with a central bank in a gold swap, the gold would
act as collateral and probably would not change its physical location and
cash would be given to the central bank.
But
the BIS corrected The Wall Street Journal's first story, saying its swap was
with commercial banks, not central banks.
While
a central bank theoretically and practically could hold 380 tonnes of
unencumbered gold, there is no way that a commercial bank is sitting on 380
tonnes of unencumbered gold. So the gold in the BIS swaps came from somewhere
else.
The
only possibility is a central bank or several central banks. (Portugal holds
380 tonnes. Just coincidence? Spain holds 280 tonnes and Greece 112 tonnes.)
So the
BIS swaps look like a tripartite transaction. 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.
Why
would this be done?
This
is not about currency liquidity, as the $14 billion reported raised is
not liquidity; it is pocket change.
On the
other hand, 380 tonnes of gold is liquidity in the gold market, where
mines produce only about 2,200 tonnes per year.
If the
BIS made the swap directly with a central bank, the gold would not be
provided to anyone for liquidity.
If the
swap was made between a commercial bank and a central bank, the commercial
bank would get its hands on the gold and the gold would change location to
the vaults of the commercial bank, a bullion bank.
This
would require the bullion bank to hand over $14 billion of its own money.
But by
doing another swap with the BIS, the commercial bank would get the money from
the BIS and technically the gold would now belong to the BIS, even as it most
likely would not change location and 380 tonnes of gold would be digitally
credited to the BIS' unallocated gold account at the bullion bank.
In
this way the central bank or banks would get cash and the BIS would get the
unallocated gold as collateral and as if by magic the bullion bank or banks
would get 380 tonnes of gold to bail them out for a few more weeks as massive
physical demand for metal eats their lunch.
And
the bullion banks would manage this without paying a dime of their own money.
Why
would the BIS be a willing player in this scheme?
Because
it would fall into the type of operations BIS official William S. White
described in a speech in 2005 when he said that among the five objectives of
central bank cooperation is "the provision of international credits and
joint efforts to influence asset prices (especially gold and foreign
exchange) in circumstances where this might be thought useful." You can
find White's speech here:
http://www.gata.org/node/4279
With
gold reaching record high prices and a run on the banks of the gold cartel
gaining pace, this must be an occasion where such an asset price-influencing
operation would be thought "useful" by those who are beneficiaries
of the longevity of the paper currency game.
The
surreptitious monthly gold sales by the IMF and this record gold swap by the
BIS are reminiscent of the London Gold Pool that ended so badly in 1968. The
Western central banks have rigged the gold market for so long that they can
no longer think straight. The only thing they can think of is to do more of
the same, hoping that this will reverse the growing mistrust of all things
paper and the entire banking system.
In the
words of the great philosopher Aerosmith, "Dream on!"
Adrian Douglas
Marketforceanalys.com
Adrian
Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.
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