Central Banks Swap Tons of Gold for Cash

Posted Jul 11th 2010 2:10PM by Connie Madon
Filed under: Industry, Market Matters, Commodities

gold prices In a footnote in a 216-page report released last week, the Bank for International Settlements (BIS) disclosed that since December, it has taken in 349 metric tons of gold from central banks, which swapped it for $14 billion in cash.

Why is this important? First off, the BIS is the central bankers' bank. We can gather from this that central banks needed cash to pay their bills. So they pawned their gold.

This move by central banks is highly unusual. Until this year, gold swaps with BIS have been relatively steady. This year the swaps took a spike upwards. Andy Smith of Bache Commodities Group said that at this rate, the BIS holdings represent the "biggest gold swap in history."

Some analysts say this exchange does not affect the gold market. However, if the central banks that lent the gold are unable to make good on the loan, the BIS could opt to sell the gold in order to get its money back. This could wreak havoc on the market.

Since the news, gold has traded down 5% from a high of $1,260 per ounce to $1,194.80.

All of this is being done in the shadows. Apparently central bankers want to keep a low profile. They can easily get cash from the BIS without notice. Gold swaps with the BIS are also cheaper that commercial loans.

One inference that we can make from all this is that central banks must be desperate for cash, otherwise they wouldn't be pawning their gold.

Would you sell gold based on this news?

Tags: Bank for International Settlements, BIS, central banks, featured, gold, gold prices, inthenews

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Reader Comments (Page 1 of 1)

7-11-2010 @ 8:29PM

Peter Van Schaik said...

I would say this is just another entry on the list of reasons I would sell gold. Actually I would have already sold the gold. The world economy is trying to contract as the irrational fear of debt spreads like the proverbial wildfire. And I do think the fear of debt at this point is irrational.

Sure, if we rely too much on debt creation for non-productive expenditures reality will eventually sneak up on us and we will experience an economic slowdown. I don't know why this fact comes as a shock to so many. If we over indulge on anything we will eventually have to pay the price.

But let's not lose sight of the fact that during the long economic expansion many of us enjoyed a really swell standard of living compared to even just a generation ago. And that wonderful standard of living full of really cool consumer goods was created and delivered to us by our willingness to borrow and spend.

Was it worth it? That is definitely a debate worth having but I'm willing to bet the majority of the 130 million US citizens still working would probably think it was well worth it. http://sites.google.com/site/jpetervanschaik/

7-11-2010 @ 9:17PM

william lindblad said...

Another possibility is that they simply think that the price has topped?

They may be swapping gold for cash simply to get the highest value. Hedge bets are not new.

It is like a coin - two sided.

7-12-2010 @ 4:11AM

Michael Sanders said...

With all the people who want/need gold, this is great news! Now, there will be hundreds of tons of it, in circulation. I gave mine away (only a couple ounces), as gifts.

Gold is now in abundance! The shortage is over!

7-12-2010 @ 6:57AM

Dan Barnett said...

Gold shortage? Gold's been available, it is merely the question of the price of the gold & the spread for the fabricator. There are numerous forms of gold so searching for a lower spread is possible. At one time you could buy Krugerrands at under spot.