Gold swap mystery deepens as BIS gets correction from Wall Street Journal

Section:

10:47p ET Wednesday, July 7, 2010

Dear Friend of GATA and Gold:

The Wall Street Journal this evening updated and corrected its report about the gold swaps undertaken by the Bank for International Settlements, disclosing an e-mailed statement from the BIS stating that the swaps were with commercial banks, not central banks as the newspaper first reported.

The updated story suggests that some puzzlement continues about the swaps:

"The enormous amount of gold involved, nearly tripling what the BIS itself owns, left many market participants wondering about the nature of the deals. The BIS declined to identify the commercial banks involved. ... It isn't clear what prompted the banks to borrow from the BIS instead of their central banks."

... Dispatch continues below ...



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Further, without citing authority the paper says "the gold hasn't entered the open market," but "if the banks that loaned the gold are for some reason unable to make good on the loan, the BIS could opt to sell the gold in order to get its money back, which could amount to flooding the market with an unexpected boost to the global supply."

But gold being money that for years has been appreciating against nearly all currencies, as noted for you a few minutes ago here --

http://www.gata.org/node/8798

-- why would any institution want to sell gold "to get its money back?" -- unless, of course, "flooding the market" and suppressing the gold price wasn't the real objective?

Another unanswered question is where the European commercial banks got all that gold, "349 metric tons ... nearly tripling what the BIS itself owns." The European commercial banks aren't known for holding that much metal on their own account. (If you rent a safe-deposit box at a European commercial bank, you might want to check its contents in the morning.)

While the story has changed in an important way, the first principle of journalism hasn't, and journalists here haven't yet demanded information from the primary sources, the BIS and the commercial banks themselves. Nor has there been any change in the conclusion that must be drawn from the story so far. That is, the secrecy and the involvement of the BIS, an admitted gold market rigger, impugn the transaction as part of another gold market rigging scheme.

The Wall Street Journal's updated and corrected story is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Commercial Banks Used Gold Swaps

By Carolyn Cui and Liam Pleven
The Wall Street Journal
Wednesday, July 7, 2010

http://online.wsj.com/article/SB1000142405274870454500457535340394356077...

The Bank for International Settlements said it loaned billions of dollars backed by gold to commercial banks in recent months.

Most of the loans -- known as gold swaps -- were conducted with European banks in exchange for foreign currencies, mainly U.S. dollars, according to data released last week in the BIS's annual report.

"The operations concerned were purely market operations with commercial banks," the BIS said in an email statement. The statement came in response to a Wall Street Journal article on Wednesday that said the BIS swaps were with central banks.

The sheer size of the recent swaps -- involving 349 metric tons of gold, valued at about $14 billion currently -- indicates the stress that the international banking system is under, particularly in European countries facing investor concerns about sovereign-debt woes.

The enormous amount of gold involved, nearly tripling what the BIS itself owns, left many market participants wondering about the nature of the deals. The BIS declined to identify the commercial banks involved.

The BIS report indicated that all its outstanding gold swaps are set to expire in less than one year, when the borrowers are obliged to repay the loans and repurchase the gold. The swaps are backed by gold held at central banks.

The Basel-based international agency is known as a bank for central banks. It takes deposits from central banks but lends to a broader spectrum of financial institutions, including commercial banks and corporations.

Through an arrangement called "gold swap," financial institutions exchange gold with the BIS in return for cash, agreeing to buy back the gold at a later date. The practical implications for the gold market are limited, because the gold hasn't entered the open market.

By contrast, the BIS reported that it had no gold swaps outstanding at the end of the prior fiscal year. Gold swaps have rarely been used at the BIS in recent years, largely because capital was often readily available in the marketplace.

It isn't clear what prompted the banks to borrow from the BIS instead of their central banks. "It's odd, but it could be bad," said Andy Smith, senior metals strategist at Bache Commodities Group in London.

Analysts note that the time of the transactions -- mostly taking place in January --coincides with a flare-up in worries about a sovereign-debt crisis in Greece spreading across Europe.

If the borrowings were prompted by the need to enhance liquidity, it would have "a greater resonance" in the gold market, said Philip Klapwijk, executive chairman of GFMS Ltd., a London-based metals consultancy. "Whatever your long position was in gold, you would rationally decide there were more risks attached to it," Mr. Smith said. "Something untoward might happen with this gold that was being swapped."

If the banks that loaned the gold are for some reason unable to make good on the loan, the BIS could opt to sell the gold in order to get its money back, which could amount to flooding the market with an unexpected boost to the global supply.

On Wednesday, the gold contract for July delivery eked out a gain of $3.80 per troy ounce to settle at $1,198.60 on the Comex division of the New York Mercantile Exchange. It is now off 5% from its record hit on June 18.

Prices of gold are up 9.4% so far this year, so banks might have to record losses on the swaps and pay more to buy back the gold from the BIS, though they may also have hedged that risk.

* * *

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