BIS gold swaps - Bulls and Bears fight out the implications

The gold swaps with the BIS have both bullish and bearish meanings for the price of the metal and some of these are set out below

LONDON - 

The excellent detective work by Matthew Turner of Virtual Metals has turned up the news that the Bank for International Settlements had effected gold swaps of 346t with other counterparties by the end of March and it would appear that the figure had reached 382t by the end of April.  This amounts to roughly 3% of the gold held by the signatories to the Central Bank Gold Agreement - although it should not, necessarily, be assumed that all of those swaps were with ECB members (indeed the BIS has told the Wall Street Journal that the swaps were mostly with commercial banks).

Source: IMF, WG

Bulls and bears can both chew on the fodder provided by this development.

BEAR - if at the maturity of any of the swaps the counterparty cannot return the currency that forms the other side of the swap then the gold reverts to the BIS and could therefore theoretically be available for sale.

BULL - In theory certainly, but that does not mean that the BIS would be a seller.  And if it were, it might not be immediate - and if it were soon, then there is always the CBGA mechanism, or at least a parallel to it (qua the IMF)

BEAR - If the action has successfully reduced stresses in the banking system then there is less need for risk hedges

BULL - Indeed, but this is a long-running saga and prudent investors will take note of gold's role in reducing exposure to default

BULL AGAIN- If this action helps to support the euro then a weaker dollar implies a higher dollar gold price?

BEAR - Not necessarily.  Especially at this time of year, seasonal demand weakness and the unwinding of gold holdings on the basis of reduced risk will render short term currency movements irrelevant.  A case in point is the heavy unwinding of euro-denominated gold holdings in the wake of the successful roll-over of the ECB's Long Term Refinancing Operation (LTRO).  The €442Bn one-year financing came to rollover on 1^st July, and the ECB pulled the one-year facility in favour of three month loans.  The markets were fearing a high demand for the new instruments; in the event the demand was for €171 Bn, which, while high of itself, was better than the market had been looking for.

BULL - Gold's role as a reserve asset has been underlined as this latest action highlights its relatively risk-free position as a non fiat currency.  The fact that countries have swapped rather than sold suggest that they want to hold on to their metal in the longer term

BEAR - EU nations are not allowed to sell gold in order to redress fiscal problems.  Furthermore the current market environment would not easily have absorbed heavy sales of gold and the signal that such sales would have sent to the market would have exacerbated existing tensions, possibly to the point of panic

BULL - Investors will be reminded of gold's role as a mitigator of risk and will want to maintain if not enhance their exposure to the metal

BEAR - but at what price?  Gold always comes under pressure in times of difficulty as distressed investors cash in their holdings in order to get out of trouble in other sectors

BULL - if the system comes under much further strain then gold is there as an asset of last resort

BEAR - That's precisely the point.  Gold will fall in times of crisis - although it may pick up later as holdings are rebalanced

BULL - And it was portfolio rebalancing at the start of the quarter that extended the gold selling as it had been one of the strongest performer in the preceding three (and six) months

And finally..., BULL and BEAR, Alltogethernow -

and if the system fails completely it won't matter who's got what as no-one will be able to trade.

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gold swap so whats really going on is bis turned into an international soveren pawn shop. now all we need to do is drive the price of gold up to a hundred thousand dollars an ounce, hock a couplde thousand tons of gold, pay off the national debt, then all . .more central bankers and their bis hock shop unload the gold oln the market, drive gold down to four hundred dollars an ounce then buy it back . .less by john moody on July 07 2010, 20:24 Find this comment inappropriate? Report it

need of real assets to replace lost real estate values Besides the ovverborrowing of the US to finance the defaults , many buyers of debt will require a hard asset to back up the US tresuries when they become mature within the next 10 years, The US economy has to either prove it has the growing economy . .more and asset values to support a roll over as the amount needed will have huge interest rates as either way deflation will cause Gold to become more of a reserve currency or inflation will cause the fear of devalued currency. If one just looks at 1980 and doesent see what gold historicaly has bought in terms of property ,from 1776-1945 it took less than 100 ounces of gold to buy a house and land, once we had to increase dirritives to hold gold down to a fixed value France started to do something about it by demanding gold for us dollars, if you intervene in a free market to the extent cbs do to keep confidence in US dollars they held because they thought it was redemable in gold. Most bears grew up with gold having no role and wont except it until they see first hand the power gold has to the rest of the world to gain power, its the same as minters putting less gold and inflating silver prices so the real asset stays with the wealthy, even without inflation gold will go to 1600. those who still chuckle own little or no bullion and most will get sucked in within 10 years.wake up. . .less by Nextgenerationrebalance on July 07 2010, 20:30 Find this comment inappropriate? Report it

point taken gold swap That is the general idea of their hope, problem is gold sellers when a huge correction comes sell to people that will horde their gold ,when they let the general public buy gold at 250 in 2001 , the chance to buy a quarter with a dime set the gold . .more rush off, when you see a 20 % correction you can bet it isnt due to gold changing hands, The developed world mainly the UK and USA dosent want to be seen actually selling the bullion to private investors to hoard, You can bet China is lying or misleading the market to slowly accumulate reserves to deter the US to push policy on China. I dont believe they will act with it unless we provoke them,every country wants to do whats best for them ,They store up for the future ,we have a mindset that we will always be number 1. They are competing with us if we keep outsourcing high paying us jobs eventually not enough us dollars will flow back into in. they will demand hard assets like gold,land etc.. We need to keep more gold at our central bank as they can just issue paper currency for it, while protecting us at the same time its another deterent that has been forgotten. If it takes less than 75 ounces to buy a home on average then gold is historically overvalued,take a look at charts 200 year charts get looked over by 40 y charts,BIG MISTAKE. . .less by Nextgenerationrebalance on July 07 2010, 22:01 Find this comment inappropriate? Report it

The US consumer Debt has to be fixed to pay govt debt. Driving the price of gold to pay off our debt would be the easy way but at high risk to national security.Even gold at 2500 would add 10-12 trillion of real value to plug the loss in realestate meltdown. The consumer needs to get out of debt before . .more the govt has a chance.To keep enough foreign dollars flowing both parties increased govt jobs to plug the outsourcing gap.All the opponents of govt debt need to chose to keep jobs in the USA at a higher cost to company stocks profit to increase the revenue to pay our debt off ,its your childrens future that will pay and the main cause was lower wages and outsourcing but the result was govt debt ,This problem started around 1916 ,had to force huge purchace power loses in 1971-1982 we could afford to give 15% then, but not now.We have become paper pushers and no one has collected, YET!!! Consumers need wage inflation SOON! We threw debt to gold 1916-present now it wants its value back ,even silver borowed from gold to fix the price higher,now paper ? next default or beg gold for a loan and convince the takers it will rise with inflation, or worse land and company takeovers.find a way for WAGE INCREASES TO FUND 1999 -2003 adjusted to real inflation for jsut a start,25% from that avg is a real adjustment,below that you lose, . .less by nextgenerationrebalance on July 07 2010, 22:55 Find this comment inappropriate? Report it

silver great info www.goldsilvervideoinfo.com by grabher on July 08 2010, 01:50 Find this comment inappropriate? Report it

Great idea for gold to help the economy If banks created a credit line for gold backing say 60-75% of spot being credit line, but the gold would have to be the exact gold you had them store if you wanted it back and assure that it wouldnt be part of the supply, charged prime rate without . .more fees. The banks could use the full spot price for there balance sheet, make money on credit card transactions and both parties win. This would put a floor on the gold price and would not hurt but help the balance sheets and grant with no risk as long as the loan is paid in full to the gold owner, Think about the bears that hate gold freezing up money from the system and because it would be highly liquid gold would be a massive stimulas while the owner could always be protected.They must pass laws to ensure your gold can be aquired even if the bank defaults as long as the money is paid in full.It could bring down other metal prices because miners would make a killing on gold and increase the supply of base metals due to new golod mines. Real growth could come from the private sector and get out debt under control.. As prices increase or decrease so does the credit line ,If they can give confidence your actual gold can only be used if you default i believe gold can play a dual role for the owner and the bank.We are talking about trillions of dollars asset backed. . .less by Nextgenerationrebalance on July 08 2010, 05:00 Find this comment inappropriate? Report it

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