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Those BIS Gold Swaps – what are they and what do they mean…?

In its 2010 ANNUAL REPORT, the Bank of International Settlements said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold, stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009."

Apparently this amount has now climbed to 382 tonnes since the report was issued, writes Julian Phillips at GoldForecaster.

Swaps are financial instruments that allow for the exchange of one asset for another, in this case, gold for currency. They are not gold leasing, futures or options (which both the 1999 and 2004 Central Bank Gold Agreements stated would not be increased; the 2009 renewal did not repeat that statement). Gold swaps, however, could be undertaken by the signatories of the CBGA, as these were not included in any of the three Agreements.

Gold swaps are usually undertaken between central banks: One central bank exchanges foreign exchange deposits (or other reserve assets) for gold with an agreement that the transaction be unwound at an agreed future date, at an agreed price.

The monetary authority acquiring the foreign exchange will pay interest on the foreign exchange received, the rate of which is currently very low. Gold swaps are usually undertaken when the cash-taking central bank may want foreign exchange but does not wish to sell outright its gold holdings.

The Wall Street Journal informs us that the BIS did these swaps with commercial banks. We know of no commercial bank that has 382 tonnes of gold on their books. It is likely then that should these commercial banks have been in the deal, they would have been acting for a central bank (or several over time) who wished to remain anonymous.

The BIS received the gold into its safekeeping for the nation that required the foreign exchange for the swap period. Swaps of this nature are renewable once the time runs out, so it is impossible to say how long the swap will last for. The central bank that undertook the swap would have to be certain that it could return the currencies to get the gold back at some point in the future. If that country defaulted, then and only then could the BIS go ahead and sell this gold. Any sale in the open market would be trumpeted loudly to all as well as reported in the press, or by the World Gold Council, the BIS or IMF.

Why use gold and not currency? The financial crisis has led to a decline in the number of credit-worthy counterparties and a reduction in credit lines these counterparties can offer. This is significant in a world where credit risk and debt problems have been the subject of banker’s fears since the appearance of the Greek debt crisis. For someone in the trouble Greece is, gold swaps allow a central bank’s reserves to be lent in a credit-secure fashion.

In other words, a gold swap allows the lender of currency to benefit from greatly reduced credit risk, as the gold can be held in an allocated account, usually at the Bank of England. The currency deposit is secured with gold throughout the life of the deposit.

Any country such as Ireland, Portugal, Spain, Italy, the UK and the USA. can follow this route. Yes, sales may not be permitted for fiscal reasons under Eurosystem rules, but these are not sales, but swaps. So, of the utmost importance is just who swapped this gold? Could it be one of the countries we just mentioned? If so, their situation is far graver than previously thought. The implication is that the collateral they offered just wasn’t good enough, so they had to use their gold. This is major news for the monetary system.

What is significant about this or these transactions is that Gold Bullion is being used in international settlements after so many decades of being sidelined in the monetary system. The transaction itself confirms that gold is being used in international settlements, which is a dynamic confirmation of gold’s return to the monetary system.

A "gold swap" might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the BIS would have to decide either to keep the gold on its books or to sell it. Again, keeping it on its books is part confirmation that gold is active again on the monetary system, a big boost by itself!

Gold, in short, is back in the monetary system.

What appears to have really happened is that one nation or more needed foreign exchange to counter some shortfall in its accounts and raised these funds as a short-term liquidity measure, believing that it would be able to return the currency and receive its gold back. The gold would then be returned at the conclusion of the swap period in return for the currencies swapped. If it fails to return these funds to the BIS, then the BIS could discreetly place the gold with another central bank, should it not want to keep the gold. If it did so, the BIS would simply report its disposal of the gold, the originating central bank would report the drop in its gold reserves and the gold-buying bank would report its increase in the reserves.

This puts the transaction into an entirely different category. It seems that one or more of the developed world’s central bank’s credit is not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into quite a spin, shaking the global financial system to its core.

No wonder the BIS is keeping such a low profile!

Buy gold at live market prices online today – start with this free gram of gold at Bullion Vault here…

Source:Gold – Back in the Monetary System!

"The careful burial of this treasure probably means the owner intended to come back…"

DONT KNOW about you, but market depth is pretty poor down at the end of my garden. Not least at midnight, when the gnomes are asleep, rather than quoting 10% bid-offer spreads on Gold Coins.

Besides the lack of liquidity and horrible fees, however, there are more strategic reasons to beware burying your gold or silver by moonlight. Someone might find it (yes, it happens, apparently). Worse still, perhaps, you might not find it yourself.

"Romans buried their stashes when fleeing Britain at the end of the empire and only a few have been discovered 2000 years later," says an email to us here at BullionVault.

"How many banks will be there in 2000 years time, or even 2 years time…?"

Good question. But then, no one buying gold today plans on waiting 20 centuries to sell. Nor did those Romano-British, of course, who fled their villas – and lost their gold forever – as Anglo-Saxon raiders crashed out of the surf onto the south coast’s cold pebble beaches…

"565 of the coins are gold solidi, but the majority (14,191) are silver, of a variety of denominations," says the British Museum of the Hoxne Hoard, Roman Britain’s richest treasure trove. It was buried sometime after the local legionaries declared one of their own as Emperor Constantine III, only to follow him in a hopeless bid to conquer Rome itself. Left with no one to guard it, the hoard wasn’t unearthed until 1992. But instead of the one-time owner’s return, it was found by a man with a metal detector, looking in a field for a hammer that his friend had just lost.

"[Some] 99% of the silver coins are siliquae," says the British Museum, "the main silver piece of the Late Roman Empire…The hoard must have been buried for safekeeping sometime after AD 407, during difficult times for the Romano-British, who were left without any help from the Empire to defend themselves from the attacks of the barbarians."

Besides these silver and gold coins, the Suffolk mud hiding this treasure yielded gold jewelry, silver pepper pots, ladles and spoons, plus tiny silver padlocks from wooden caskets "into which the treasure had been carefully secreted," say the British Museum’s experts. They add that:

"The careful burial of this treasure probably means the owner intended to come back and recover it later, but for whatever reason was unable to do so."

Whatever terrors drove Hoxne’s elite to first bury their wealth, then flee for their lives…and then never return to reclaim it…gold bugs have long been derided for digging gold out of one hole-in-the-ground, only to bury it deep in another. "Anyone watching from Mars would be scratching their head," as Warren Buffett once said. (Either that, or they’d be taking down the co-ordinates.) But then all gold ownership, whether hung round your neck or stowed in your wallet, means burying wealth. Neither does it yield aught or grow. Gold simply stores value – now badly, now well…depending on how the better alternatives are doing…holding an economic use that is social, not industrial, but is clearly "productive" when productivity fails.

The final reason to take care stashing your gold in the garden runs beyond safe-deposit and even secure vaults inside your own borders, too. Because history shows that gold commonly becomes unusable if physically held where it’s most needed, in a country where genuine crisis has struck. Just glance at the French, Russian or Cambodian revolutions…Nazi Germany…or Saddam Hussein’s Iraq. Gold then exposed its owners to great risk, either through confiscation or personal safety. Because right when it should have come into its own, the sheer value of gold amid crisis made it worse-than-worthless if held in arm’s reach.

Fleeing social collapse with your life would prove hard enough. Getting out with both your wealth and your life could prove impossible. No, owning gold outright elsewhere in the world wouldn’t guarantee your survival. But at least it wouldn’t hinder your flight. And at least you’d have someplace to flee to.

Want to buy gold in your choice of London, New York or Zurich today…?

Source:Holes in the Ground

With no such thing as a safe bet, investors turn to the untraditional The Tennessean, TN - Dec 12, 2008 They're looking for gold — gold coins, bars and ingots that they can carry home and lock away for safekeeping. Company President Mike Mouret estimates the …

Source:With no such thing as a safe bet, investors turn to the untraditional – The Tennessean