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The Bank of International Settlement holds 500.7 tonnes of gold as at the end of 2010. Why?
In the third quarter of
2009 it held just under 120 tonnes. These were part
of currency/gold swaps. There are no details of the names of the
counterparties. Coincidentally, they could be nearly the total of the
‘official’ gold holdings of Greece, Portugal and Spain.
What of Greece’s 111 tonnes
of gold?
It is pure conjecture on our part to link the gold holdings of three
of the Eurozone’s financially weakest members to the B.I.S.
In the first quarter of 2010 the B.I.S. recorded the jump in gold
holdings that it had acquired. Four years prior to that Portugal and Spain
had sold gold through the Central Bank Gold Agreement on the open market. So
we do not link sales under that agreement with these B.I.S. transactions.
The B.I.S. acquired this gold though a set of Currency / Gold
arrangements the details of which have not been made public. But it was at
about this time that the Eurozone debt crisis reared its ugly head. In
advance of any rescue plans, when the respective central banks probably first
began discussions on the matter it would have been deemed prudent to makes a
collateral arrangement using the asset of last resort, gold, to secure their
gold against any future bailout package being offered.
While a swap arrangement is not a sale of gold nor is it a disposal,
it is sufficient for the B.I.S. to record the gold swapped as an acquisition
in its books. But the central banks involved need not record its disposal,
giving us a rather clandestine situation.
Hence the question, “What of Greece’s 111 tonnes of gold?”
We cannot see just how the Greek bailout package can force the sale of
state assets with no mention of its gold [worth $5.5 billion at present
prices]. We have no doubt that Greece will cling onto the family’s
jewels as long as possible, but the creditors will fight to get the gold as
hard as Greece fights to hold onto it. Should the news come out that the gold
was handed over last year in a futile ‘swap’ there will be fur
flying and not a few of the present government will lose their seats in
Parliament. It will be a very sensitive issue. Perhaps that’s why it
hasn’t been mentioned yet?
What price Greece’s gold?
In times like today in Greece, 111 tonnes of
gold is worth considerably more in international collateral to a bankrupt
nation than $5.5 billion. It is the means to cover imports, when there is no
other money to pay for them. These may be necessities. Money is far more
valuable when you haven’t got it than when you have! And gold will be
fully accepted from Greece, anywhere and anytime. If it’s already gone,
then there’ll be more than a sense of humor failure in Athens.
And for this reason alone gold as a reserve asset is undervalued.
Central banks hold gold for times such as these.
When the whole world hits these types of crises [such as war], a
currency price put on gold is not the basis on which gold is used. The
emotional value in such times is far higher for any deal to be concluded. At
such times gold can secure far more goods that its price implies, because of
the dubious value national currencies will have internationally. When gold is
tied to these currencies, then gold has considerably more value because of
the support it gives these currencies. And this is why the issue of
Greece’s gold is so pertinent.
If such a crisis happens in isolation, then the
dollar or euro price of gold would be used, because of the relative stability
in the rest of the world. So Greece may get no more than $5.5 billion for its
gold. But if the B.I.S. currency/gold swap were tied to sufficient bailout
support being given, then its value would extend far beyond its price.
This is why gold’s price rise is far from over. The path the
developed world is following currently is headed to potentially stormy days
where gold’s use as selective collateral will bring far more than its
market value to a nation. That’s why central banks are gripping hard to
the gold they have or buying more.
CONCLUSION
Are
central banks tempted to confiscate debt-distressed nation’s gold?
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