346 tonnes of gold at the BIS

[sandwind]

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.

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 . . . “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.”


http://ftalphaville.ft.com/blog/2010...ld-at-the-bis/

http://online.wsj.com/article/SB1000...googlenews_wsj

[FrankL]

Re: 346 tonnes of gold at the BIS

If I understand this correct, these are swap arrangements where the central banks receive foreign currencies. At a future date the positions are unwound with interest to be paid to the BIS. e.g. central banks are borrowing money from the BIS and use some of their gold reserves as collateral.

Why would they do this? Do they need to provide extra USD liquidity for their commercial banks?

If yes, why do it this way rather than use the FED swap lines? Are those politically problematic these days? Or is it done by central banks that do not have access to the FED swap lines?

[FrankL]

Re: 346 tonnes of gold at the BIS

dupe - please delete

[Chris Coles]

Re: 346 tonnes of gold at the BIS

Always a good investment strategy is to sell as the price rises. I see no long term problem with this news.

[D-Mack]

Re: 346 tonnes of gold at the BIS

Always a good investment strategy is to sell as the price rises. I see no long term problem with this news.

The Brown approach ?

Although none of the major bullion banks (actual or potential CB counterparties) will want to discuss this, the high probability is that much of this gold was actually sold into the market.

Read more: http://www.businessinsider.com/heres...#ixzz0szH6VfSf

[FrankL]

Re: 346 tonnes of gold at the BIS

The Brown approach ?

Why is any selling involved? Why would the BIS sell these holdings if they have to return them to the central banks at maturity? I doubt that the BIS is speculating with their holdings...

If the central banks want to raise cash and actually put the gold into the open market, why not lease the gold to bullion banks?

[big67]

Re: 346 tonnes of gold at the BIS

These are swaps, so somebody is raising cash by pledging a collateral... why would a "central bank" do so? Can't they just pledge some of the crappy bonds they have on their balance sheet?
The list of Central Banks gold holdings provides some hints: in my humble opinion it may well be the IMF raising funds for its programs...
Anyway, isn't a swap bullish? I mean, no one swaps a depreciating asset, because they will have to purchase it back at a premium if the price falls.
Moreover this is reasserting the monetary value of gold.

[GRG55]

Re: 346 tonnes of gold at the BIS

The Financial Times is reporting that it is commercial banks that are engaging in the swap activity, not Central Banks...

European banks use gold reserves to raise cash

By Jack Farchy in London
Published: July 6 2010 23:11 | Last updated: July 6 2010 23:11

European commercial banks have begun using their holdings of gold to raise cash with the Bank for International Settlements, in a further sign of strains in the money markets on which many rely for funding.

The BIS, the so-called “central banks’ central bank”, took 346 tonnes of gold in exchange for foreign currency in “swap operations” in the financial year to March 31, according to a note in its latest annual report.

In a gold swap, one counterparty, in this case a bank, sells its gold to the other, in this case the BIS, with an agreement to buy it back at a later date.

In the past the BIS has occasionally engaged in gold swaps.

There has been no mention, though, of any such operation in recent years.

The gold swaps detailed in the annual report began in December last year, according to monthly data from the International Monetary Fund, and have surged since January, when the Greek debt crisis erupted.

The amount raised in the operations, just over $13bn at current prices, is small compared with the wholesale money markets. But the fact that banks are using their gold holdings to raise capital is a further indication of the stress in the sector.

Euribor, the rate at which eurozone banks lend to each other, has risen for 27 successive days, while markets are nervous about the impending release of bank stress tests in Europe, scheduled to be published at the end of the month.

The BIS annual report says the gold received in the swaps was held “at central banks”...

[big67]

Re: 346 tonnes of gold at the BIS

I feel that some important piece of information is amiss...

[FrankL]

Re: 346 tonnes of gold at the BIS

On page 171 of the report

Included in “Gold bars held at central banks” is SDR 8,160.1 million (346 tonnes) (2009: nil) of gold, which the Bank held in connection with gold swap operations, under which the Bank exchanges currencies for physical gold. The Bank has an obligation to return the gold at the end of the contract.

They state that the gold is held at central banks (presumably the banks that engaged the swap with the BIS). Nowhere are commercial banks mentioned in this as far as I can see. Do commercial non-bullion banks even hold much gold?

I wonder which central banks did the swaps and if there's a connection with the graph on page 40
caption:

Estimates of short-term funding needs of internationally active banks headquartered in Germany, the Netherlands, Switzerland and the United Kingdom, in trillions of US dollars.

which shows a figure of 0.5 trillion USD lower bound and 3.75 trillion USD upper bound short-term USD funding needs. Of course, 14 billion USD would be only a drop in the ocean compared to those amounts.

[we_are_toast]

Re: 346 tonnes of gold at the BIS

Moreover this is reasserting the monetary value of gold.

I normally am not a suspicious person, but this story seems to keep running.
Why gold?

Everyone knows the dollar as the worlds reserve currency is on it's last legs. I think everyone also realizes the possibility of gold as some portion of a basket of things, might be tried as backing for some world reserve thingy.

So why in the world would a central bank risk it's gold now? I guess if you were absolutely desperate for foreign currency you would have to do it. But 14B is certainly a drop in the bucket.

I feel that some important piece of information is amiss...

Yep, something doesn't seem right here.

[Ben]

Re: 346 tonnes of gold at the BIS

Might be a slightly seperate issue, but the point that central banks could flood investment demand has always been a fav anti-gold point, and it is true. Isn't the idea of this story that they have been lending it to IBS, and might not buy it back? They could graduate to selling gold to raise money because they need to cut budget deficits. This seems like quite a negative trend. It could put a cap on the party, since central banks really do have a lot of gold.

[ASH]

Re: 346 tonnes of gold at the BIS

Might be a slightly seperate issue, but the point that central banks could flood investment demand has always been a fav anti-gold point, and it is true. Isn't the idea of this story that they have been lending it to IBS, and might not buy it back? They could graduate to selling gold to raise money because they need to cut budget deficits. This seems like quite a negative trend. It could put a cap on the party, since central banks really do have a lot of gold.

My impression was that the quantity of gold held by central banks is small compared to national liabilities, so I tried to look some numbers up. European central banks have 10 or 11 tons of gold. At 32150.75 troy oz per ton, and not counting any depression of price that would accompany sales, that would yield about $436B. Apparently, the 27 EU nations had a net deficit of about E800B in 2009. On the other hand, they were running more in the E100B-E300B range in prior years. So, it seems to me like the market value of their gold is not large enough to cover more than one year's deficits entirely -- and only half of the recent annual deficit -- but they have enough gold to be significant help. On the other hand, selling assets is only something you can do once (because then you run out of assets), and if they tried to sell a lot of gold (enough to make a dent in one year's deficit), the price would no doubt crash, so they'd be unable to actually raise as much cash as calculated here. So, the question is whether they can sell enough gold to matter for their budgets, without getting diminishing returns.

[big67]

Re: 346 tonnes of gold at the BIS

My impression was that the quantity of gold held by central banks is small compared to national liabilities, so I tried to look some numbers up. European central banks have 10 or 11 tons of gold. At 32150.75 troy oz per ton, and not counting any depression of price that would accompany sales, that would yield about $436B. Apparently, the 27 EU nations had a net deficit of about E800B in 2009. ...

I would add that the amount of gold is not really evenly distributed in the EU...

[ASH]

Re: 346 tonnes of gold at the BIS

I would add that the amount of gold is not really evenly distributed in the EU...

That's a very good point -- both the deficits and the gold are fragmented at the national scale. Perhaps some of the bigger gold-holders might have smaller deficits, so a sale would make more sense?