ST. LOUIS (MineFund.com) -- The Bank for International Settlements finds itself once again at the nexus of gold market conspiracies and rumour mongering. Bizarrely, the revelation that the BIS has engaged in some $13 billion worth of gold-for-cash swaps - presumably with central banks using commercial banks as agents - is being interpreted negatively and is blamed for sending gold into a minor dive below $1,200.
The BIS has been taking transfers of gold since December, accumulating 349 tonnes in five months to the end of April.
This is not information that can be hidden from the most informed market participants, and we dispute that it can be disguised with much effect for half a year especially since commercial banks were involved. Yet the media is in uproar about the supposed shock of the news and the threat it poses.
For example, even whilst acknowledging that the BIS data has no practical implications for the gold market, the Wall Street Journal could not refrain from a negative view: "The prospect that the gold isn't locked up in central bank vaults as investors thought - and that it may, in an extreme case, be seized and sold on the open market by the BIS - gave some investors pause."
Rather than being negative for gold, the news is positive. Firstly, investors have never regarded central banks as strong hands for gold. Second, it confirms that gold is the money of last resort since banks were forced to surrender their metal in order to satisfy near-term cash requirements that could not be satisfied through the printing press and discount window.
Third, the gold was swapped rather than sold. Whilst the metal could make its way to the market, it is literally inconceivable. Were that to happen, the circumstances would be bullish for bullion because it would signal that the swap originators had expended their resources and were essentially in default. That would result in a profound shock to financial assets seen in spiking credit default swaps and additional pressure on embattled sovereign instruments.
The other option, put forward by FT Alphaville, is plausible but unlikely - that traditional gold leasing has been reversed. "The central bank arbitrage therefore it seems has simply been reversed, largely because the amount of gold that is in the system is more than the market can finance.
"In other words, from the BIS perspective, gold forward rates may have finally become steep enough for it to arbitrage the market."
We say unlikely because the timing of the swaps looks less like financial engineering than balance sheet defence and, if you're cynical, some fee generation for the commercial banks involved.
All told, $13 billion is a small, if not insignificant sum, in the context of the seemingly perpetual credit crisis. But is a very big transaction by gold market standards.
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