I’m Calling “Bull$hit!”

(11AM EST – promoted by Nightprowlkitty)

In the most recent week it was divulged by the WSJ that the Bank of International Settlements (BIS) official gold holding have tripled! Where did all this gold come from and why is it suddenly moving around remains a mystery.

Why should care? Because gold is being recognized as the worlds only real money once again and colored paper is being called into question … even by banks.

However yesterday the official denial arrived in the WSJ when they reported this:

“The operations concerned were purely market operations with commercial banks,” the BIS said in an email statement.

Bullshit! This lame excuse doesn’t fly.

Who is the BIS? The BIS is a private institution known as the Central Banks, Central Bank.  

What prompted this pathetic retraction was this article in the WSJ last week

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. Instead, the BIS data show that they have been entering these gold swaps-exchanging their gold with the BIS in return for cash, agreeing to repurchase the gold at a later date.

And it didn’t stop there.

The BIS annual report covers the 12-month period through March. April data show that an additional 32 tonnes of gold were put up as collateral that month, suggesting further loans were taken out with the BIS.

At this rate, the BIS holdings represent the biggest gold swap in history.

The increase in the use of gold swaps is particularly surprising because central banks have rarely used them for decades, and the amount of gold at the BIS has remained stable for years.

Think of gold swaps as pawning an asset

Gold swaps are quite different from gold leasing although both can exist with the same asset in multiple transactions. Jesse’s Crossroads Café has a great explanation of how this works.

Some parties have mistakenly asserted that since a swap is not a lease for accounting purposes, which is quite correct, then the gold could not have been sold. That is just a simplistic misconception. A swap transfers the benefits of the assets from one party to another for a period of time in exchange for interest paid, generally on forex received. Its does not sell the property but it transfers the mineral rights for a time, if you will.

The party that then holds that gold asset can just hold it, or they can utilize it in some way, such as leasing it out for a period of time to another party, like a bullion bank, who can subsequently sell it. These types of ‘three way deals’ were very commonly seen when Lehman and Bear Stearns started to unravel and they needed ot be unwound, and were a key component of the whole issue of hidden counter party risks. Remember that?

There are a few things you should draw from this:

1.The BIS generally does business with central banks.

2.Commercial banks do not hold or transact in physical gold, it is central banks that hold gold.  

3.In the last few years Central Banks have been buyers of gold.  

Turning to the actual BIS annual report itself where it says (pg 163):

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.

Musical Interlude

I couldn’t get no silver, I couldn’t get no gold,

You know that we’re too damn poor to keep you from the Gallows Pole.

Hangman, hangman, hold it a little while,

I think I see my brother coming, riding a many mile.

Brother, did you get me some silver?

Did you get a little gold?

What did you bring me, my brother, to keep me from the Gallows Pole?

Gold is back and alive in the monetary system!

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.

So what do we have here? Physical gold has been moved onto the BIS account books without any accompanying announcement. In fact this was discovered by some analyst plowing through the BIS annual report footnotes which means, to me, that it wasn’t suppose to be found.

We have a transaction that took place between a central bank and the BIS, why? Central banks control their own printing press and can produce all the paper currency they need. So it leads one to think that they need currency other than their own … say USD.

… the U.S. Federal Reserve lately has made all sorts of currency swap arrangements with other central banks so that they all can have plenty of dollars to use for market intervention. Other central banks have been able to obtain plenty of dollars just by creating more of their own currency and exchanging it with the Fed. In effect all the major Western central banks now are able to create dollars at will.

Somebodies credit is in the outhouse me thinks. Central banks around the world have swap agreements yet we are led to believe that some commercial bank has its hands on 349 tonnes of physical gold and needed to get a pittance $14B? Better check your safe deposit box.

Which leads me to the amount. $14 Billion in todays market is miniscule compared to upcoming sales of Treasury debt [$69B] You just cant print gold like this!

An interesting side note has to deal with the IMF (part of the central banking system). Since last year the IMF has been selling gold… but thats not the interesting part. For years the IMF has threatened to sell gold into the market to attempt to influence prices. The announcement was made, the price would drop but no gold was ever sold. Then last year, after gaining approval to sell 403.3 tonnes, the IMF sold over 200 tonnes of gold to India at a price of $1045 oz. Since January however, with approx. 191 tonnes remaining to be sold, zero announcements have been made, yet another 55 tonnes have been sold to unknown entities for an unknown price.

The gold market is small in comparison to all other markets. The CBGA is now in its third extension and central banks have become net buyers.

CBGA sales have collapsed this year with less than one tonne coming onto the market under CBGA3 so far this calendar year.  The majority of sales into the market since January have come from the IMF, which has sold almost 39t into the open market this year, leaving almost 153t to go.