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Mystery around BIS gold swaps impugns them as market rigging

Section: Daily Dispatches

11:45a ET Wednesday, July 7, 2010

Dear Friend of GATA and Gold:

What can be made of this week's reports that the Bank for International Settlements has undertaken gold swaps with central banks, giving them dollars for their pawned gold?

A few things have to be considered.

First, the BIS apparently has been engaged in surreptitious manipulation of the gold market for a long time.

GATA has often publicized the acknowledgement made by BIS official William S. White in a speech to central bankers and friends at a BIS conference in Basel, Switzerland, in June 2005. Among the five objectives of central bank cooperation, White said, was "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:

The profile of the BIS published in November 1983 by Harper's magazine and written by Edward J. Epstein, who seems to have had unprecedented access to bank officials, described the bank as frequently intervening in the gold market surreptitiously:

And of course the BIS was the lead defendant in GATA consultant Reg Howe's gold market manipulation lawsuit in U.S. District Court in Boston in 2000:

So the BIS' gold dealings cannot be assumed to be innocent.

... Dispatch continues below ...


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Second, while news reports describe the BIS gold swaps as a means for central banks to "raise cash," central banks are able to create money out of nothing; they don't have to sell or lend anything to create money, or at least not to create their own money. They might have to sell or lend something to obtain the currency of some other nation. For example, other nations might have to sell or lend gold to obtain U.S. dollars.

But, third, the U.S. Federal Reserve lately has made all sorts of currency swap arrangements with other central banks so that they all can have plenty of dollars to use for market intervention. Other central banks have been able to obtain plenty of dollars just by creating more of their own currency and exchanging it with the Fed. In effect all the major Western central banks now are able to create dollars at will.

So why did any central bank have to lend or pawn its gold to get dollars?

Was there some agreement among central banks, or some insistence by the United States, that more gold had to be put into the market to defend currencies, government bonds, and low interest rates, to augment the quiet gold sales recently undertaken in London every month by the International Monetary Fund? The IMF too is supposedly selling gold to "raise cash," even as it is part of the central banking system that can "raise cash" just by creating it. Have the Western central banks more or less re-established the price-suppressing London Gold Pool of the 1960s, only this time surreptitiously?

Given the BIS' traditional interest in "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," the BIS-arranged gold swaps must be suspected as part of a scheme to manipulate the gold market.

In any case why is the mystery, the lack of official explanation, of these transactions accepted as the natural order of things?

Why has the news of these transactions been entirely a matter of one particular market analyst's deciphering a footnote in the back of a BIS report published a week ago?

Why did the BIS and the central banks involved in the transactions make no announcement?

Why aren't financial news organizations demanding candid answers from the BIS and its associated central banks about what's really going on here?

Why, instead, are financial news organizations relying on mere speculation from private market observers?

Of course there was no announcement or candid explanation from the BIS and the central banks because what they do is indeed most likely market manipulation and cannot bear scrutiny.

And there is no effective inquiry from financial news organizations, no going to the source, because they're lazy, ignorant, scared, or simply bought by the financial institutions they report about.

An example of such timid reporting, from today's Wall Street Journal, is appended.

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

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Central Banks Swap Tons of Gold to Raise Cash, Surprising Market

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

Central banks are pawning their gold to the Bank for International Settlements at a record rate, taking advantage of the precious metal's historically high value to raise cash.

A little-noticed data point at the back of a 216-page report released last week by the BIS shows the international agency has taken 349 metric tons of gold since December -- allowing central banks to raise a record $14 billion.

The number surprised the market, which had assumed most central banks had retained their holdings of gold. Instead, the BIS data show that they have been entering these gold swaps—exchanging their gold with the BIS in return for cash, agreeing to repurchase the gold at a later date.
The sharp increase in January, when most of the borrowing took place, coincides with a flare-up in worries about a sovereign-debt crisis in Greece spreading throughout Europe. At that time, borrowing costs soared and liquidity tightened.

Some central banks may have begun to fret, and chose to turn some of their holdings to cash as a standby, said Philip Klapwijk, executive chairman of GFMS Ltd., a London-based metals consultant.

"It suggests a bit of a last-resort measure," Mr. Klapwijk said.

The increase in the use of gold swaps is particularly surprising because central banks have rarely used them for decades, and the amount of gold at the BIS has remained stable for years.
Central banks of developed countries have relatively easy access to capital and capital markets, while emerging countries have generally been increasing their foreign reserves.

While the use of swaps has no practical implications for the gold market, the report helped weigh on gold prices, which have already come under pressure since reaching a peak last month.

The prospect that the gold isn't locked up in central-bank vaults as investors thought—and that it may, in an extreme case, be seized and sold on the open market by the BIS—gave some investors pause.

On Tuesday, the most actively traded gold contract, for August delivery, dropped $12.60 per troy ounce, or 1%, to $1,194.80 on the Comex division of the New York Mercantile Exchange. It is now off 5% from its record high hit on June 18.

The BIS report could change investors' perception of gold as an asset to protect against the impact of global sovereign-debt woes, said Nicholas Johnson, co-manager of Pacific Investment Management Co.'s CommodityRealReturn Strategy Fund, a mutual fund with about $16 billion in assets.

"Originally sovereign financial troubles were taken as unambiguously bullish" for gold, Mr. Johnson said in an email.

"But some are now rethinking this if the gold that sovereigns hold has been pledged as collateral to someone else who has more ability to liquidate those holdings."

If the central bank that lent the gold is 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 would amount to flooding the market with an unexpected boost to the global supply.

The BIS annual report covers the 12-month period through March. April data show that an additional 32 tons of gold were put up as collateral that month, suggesting further loans were taken out with the BIS, said Andy Smith, senior metals strategist at Bache Commodities Group.

At this rate, the BIS holdings represent the "biggest gold swap in history," Mr. Smith said.

Central banks probably chose to swap gold for cash with the BIS—which is known as the central bank for central banks—because it is less visible to the market and probably cheaper than a syndicated loan from commercial banks, Mr. Klapwijk said.

Gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments' economic stimulus packages. It has also been used as a haven against another financial meltdown.

The news of the swaps comes as the World Gold Council, a trade group backed by miners, is trying to persuade central banks to buy more gold. The group sent a 28-page report to more than 800 central bankers and fiscal policy makers around the world, laying out the argument for increasing their bullion holdings.

Many central banks in rapidly growing countries have less than 2% of their reserves in gold, including China, Brazil, South Korea and Malaysia. By contrast, the U.S. has 72.8% of its reserves in gold.

Many developing countries are reluctant to increase their gold holdings significantly. Gold's volatility and its inability to generate income have long been cited as reason why central banks don't want to enhance their gold holdings. Countries also fear that it could become difficult to liquidate their holdings in a pinch.

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