Last updated: July 7 2010 19:00
What to make of the news that the central banks’ central bank is sitting on 346 tonnes of gold? It is held via gold swaps between the Bank for International Settlements and European commercial banks that have collateralised loans with ingots. Such operations had been rare in recent years but took off in earnest just as the Greek sovereign debt crisis erupted – so the news, contained in a note to the BIS’s annual report, unleashed numerous conspiracy theories.
Traders theorised that one or more of the bloc’s central banks pawned gold to prop up their groaning banking systems. Spain’s regional savings banks, or cajas, and Greek lenders, for example, have sucked in copious liquidity in recent months and are likely to need more. These transactions bore all the hallmarks of a furtive operation to assist a peripheral eurozone central bank unwilling to be seen pawning its reserves. But the swaps raised only $14bn – surely not enough for any such sweeping operations. Another tale was that the central banks used swaps for bridging finance pending drawdown of the eurozone rescue package; but again, the numbers fail to stack up. An even more far-fetched explanation has the International Monetary Fund selling reserves to boost its own finances ahead of a bail-out.
The reality is almost certainly more prosaic, having more to do with the technicalities of the collateralised lending market than with the entry of a big new player. But the far-fetched theories still had a real-world consequence and put the skids under gold: prices slid back to late-May levels on the news. Ironic, really, since it is jitters about the eurozone debt crisis that had fuelled the precious metal’s fabulous rise – up 15 per cent from the start of the year to a nominal high of about $1,265 a troy ounce two weeks ago.
Copyright The Financial Times Limited 2010.
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