Gold Swap

Disclosure: I have liked gold since 2007 and still do. Does not mean I have any position in it right now.


http://online.wsj.com/article/SB10001424052748704178004575351421947803404.html?mod=googlenews_wsj



The article notes that some central banks (we do not know which countries) have entered into a gold swap with BIS (Bank of International Settlements – think of it as a central bank of central banks) to the tune of 346 tons of gold. The article seems to imply that it is to be interpreted as central banks unloading gold from their reserves.

Gold swap is a contract where one party grants temporary ownership of physical gold to another party in exchange for paper currencies WITH EXPLICIT AGREEMENT TO RETURN THE CURRENCIES FOR THE GOLD IN THE FUTURE. So there really isn’t any change of ownership taking place here. I believe the physical gold isn’t even moved - it’s just the theoretical title that is transferred. BIS isn’t allowed to sell that gold because although they’re in custody of the gold they are obligated to return it.

Here is what I gather is gold swap description from IMF: Gold swaps are typically undertaken when the cash-taking monetary authority has need of foreign exchange but does not wish to sell outright its gold holdings. NOTE: there is no selling of anything by anyone. Gold swap is NOT gold sale.

I reckon the fear is being stirred over the reason the central banks engaged in the swap. Are central banks unable to raise money? Are things that dire? If the central banks cannot return the money then would BIS flood the market with gold?

Well, I reckon above concerns are not impossible but highly unlikely. It seems people’s nerves are frayed with all the market jitters. IF central banks really are in rough enough shape that they cannot meet this obligation then there is something terrible going on and if anything gold is likely to rise in flight to safety.

Is this news behind gold’s recent “plunge?” Well, gold is 5% off recent high as the article states. I think I would call that a normal price action in a volatile market.