Commercial bank ‘gold swap’ intrigue continues

[Joanne98]

The footnote in the Bank of International Settlement’s latest annual report, which revealed the bank was sitting on 342 tonnes worth of gold (about $14bn) as part of a ‘gold swap’ deal with a (or some) mysterious counterparties has on Thursday been further clarified.

The Wall Street Journal’s version of the story, which described the counterparties involved as central bank institutions, has been retracted in favour of the Financial Times’ original - which said the counterparties were European commercial banks.

As the WSJ noted:

The Bank for International Settlements said it loaned billions of dollars backed by gold to commercial banks in recent months. Most of the loans—known as gold swaps—were conducted with European banks in exchange for foreign currencies, mainly U.S. dollars, according to data released last week in the BIS’s annual report.

“The operations concerned were purely market operations with commercial banks,” the BIS said in an email statement. The statement came in response to a Wall Street Journal article on Wednesday that said the BIS swaps were with central banks.

The sheer size of the recent swaps—involving 349 metric tons of gold, valued at about $14 billion currently—indicates the stress that the international banking system is under, particularly in European countries facing investor concerns about sovereign-debt woes.

As the report explains, while the BIS — known as the “central bankers’ central bank” — is only allowed to take deposits from said central institutions, it can lend to a broader spectrum of financial institutions, including commercial banks and corporations.

(Although we can’t actually find the relevant bit in the BIS mandates that says as much — and would welcome a link if anyone has it.)

The continuing mystery, though, is how European commercial banks managed to get hold of as much as 342 tonnes worth of gold.

Lex speculated on Thursday:
http://ftalphaville.ft.com/blog/2010/07/08/281356/commercial-bank-gold-swap-intrigue-continues/

[westerebus]

1. Zurich is my bet.

What did they buy to protect the Franc? And what did they have to trade to get it?

When the PIIGs unwind, will it be the IMF or BIS that will act as the conduit?

There is already talk the IMF will act for the EU as the managing authority for this possibility. If one were to restructure a european central bank would it not be prudent to use a currency other than dollars?

Once the SDR's come out there's no putting that genie back in the bottle. It would make China happy in a big way. But that's a different subject.

So why not Swiss Francs? It's just so European.

If in fact. Ms Merkel is serious about deflating the EU and taking down the Euro what would the German's sell and what would they buy? Hint, sell the shiny stuff and buy the pretty alpine paper.

It's not like there is any history between German and Swiss banks that we could construe such a move.

Thanks, Joanne. This could get interesting.

[Po_d Mainiac]

2. The SNB are buying EUR

The CHF is way too high for SNB comfort. If anything it would appear they are in concert with Bonn

It's estimated that their hit to date is a loss of 8 billion Euros
http://www.zerohedge.com/article/official-estimates-confirm-zero-hedge-projections-snb-will-suffer-%E2%82%AC8-billion-fx-intervention

Therefore if anything they would be monetizing gold....Would CS be shorting their own CB?

Westerebus, am I missing something?:toast: This virtual round is on me

[westerebus]

3. Monetizing in expectation of deflation.

For a tidy sum given the amount of gold reserves held from the beginning of time. Cash in hand takes the pot, the kettle and the cow.

As for the 8 billion loss(?) that doesn't necessarily preclude the SNB from having used someone else's money to prop up the Euro while claiming they have concerns over their currency's higher valuations.

Swiss bankers are not in the habit of loosing money.

Considering not all the EU countries take German policy as good for the goose, good for the gander. To put it politely. In the view of those opposed to German policy, the eight billion euro loss(?) that postponed the euros collapse may be money well spent.

The ECB recently pulled their version of the open window. Team Brussels vs Germany 0-0 and they move to the next round.

Would Credit Swiss short SNB? You'd have to ask Tiger Woods. As I think the outcome would be the same.

Keep an eye on Latvia.

:toast: