Thursday, July 8, 2010

• Behind the gold takedown… central banks

Mystery solved. We think.

Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…

Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) -- the central bankers’ central bank -- and helping to depress the price.

“When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”

Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.
Why then the reversal in the price over this past week?

While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal -- 82% of all the gold that central banks snapped up last year.
In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.
“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”
As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”
The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”

Worth keeping an eye on.

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