BIS Gold Swaps and China: Two Cases for Gold Bearishness

Includes: GLD, IAU, SGOL
by: Kay McDonald

The recently released annual BIS report [pdf] revealed that it has engaged in record setting gold swap contracts in early 2010 which have tripled the amount of gold that the BIS normally holds. The BIS is considered to be "the central banker's bank" and its board members include the likes of Ben Bernanke, Jean-Claude Trichet, and Mervyn King.

The amounts were reported by the WSJ 7/7/2010: Central Banks Swap Tons of Gold to Raise Cash, Surprising Market

Starting last January, when things were heating up in Greece, a number of Central Banks pawned their gold [349 metric tons] for currency to the tune of $14 billion in swap contracts which need to be settled later. The expectation is that if the currency cannot be paid back, the gold might be put on the open market.

A flury of speculation for the swaps has been flying around. Suspected motives behind them included the fact that gold prices were high at the time, the method of raising cash had the advantage of being a somewhat invisible move, that it was a bridge loan for the IMF, that the swaps were made for peripheral central banks since restrictions in place made the usefulness of such swaps limited for eurozone banks, and that it was a cheaper choice than obtaining loans from commercial banks.

The swaps, though not a large part of the wholesale money markets, are surprising because until this year the amount of gold held at the BIS had been stable for many decades.

The answer behind the mysterious moves was revealed by the WSJ 7/7/2010 in a follow-up story here. The BIS revealed to the WSJ in an email that the moves were "purely market operations with commercial banks", but the banks were not identified. All contracts are to expire within a year. (FT/Alphaville analyzes this announcement further if you're interested.)

While no surprise, this is not exactly a comforting explanation.

As an aside, the U.S. holds 73% of its reserves in gold as compared to 2% for China and Brazil, for example. In another recent surprise for gold bugs, China has announced that it will not be adding more gold to its reserves.


If China is not adding to its reserves, if ongoing deflationary trends eat into commodity prices, and if the BIS ends up selling this newly held gold within the year, then gold bugs beware.

Disclosure: No positions