A Return to the Gold Standard, or Gold Behind Currencies – Part 5/5 - GoldSeek.com

This is the fifth and final part of a five part series on how gold will return to the monetary system globally but not in the form of the defunct Gold Standard.

Present Use of Gold in International Financial Dealings

B.I.S. Gold / Swaps 

In 2011, according to the B.I.S.’s annual report, Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade. The move, disclosed in the BIS annual report, marks a sharp reversal from last year when central banks added similar amounts to deposits of gold at the so-called “Bank for Central Banks”. Why? First let’s look at what Swaps are.

What are Swaps and who does them?

Swaps are financial instruments that allow for the exchange of one asset for another –in this case, gold for currency. They’re not gold leasing, futures or options (which the 1999 and 2004 Central Bank Gold Agreement states would not be increased; the 2009 did not contain the statement). Swaps could be undertaken by the signatories of the CBGA as these were not included in any of the three Agreements.

Gold swaps are usually undertaken between central banks: One central bank exchanges foreign exchange deposits –or other reserve assets— for gold with an agreement that the transaction be unwound at an agreed future date, at an agreed price.   

The monetary authority acquiring the foreign exchange will pay interest on the foreign exchange received, the rate of which is currently very low. Gold swaps are usually undertaken when the cash-taking central bank may want foreign exchange but does not wish to sell outright its gold holdings.  

Commercial Banks?

The Wall Street Journal informs us that the B.I.S. did these swaps with commercial banks. We know of no commercial bank that has such tonnages of gold on its books. It’s likely then that should these commercial banks have been in the deal, they would have been acting for a central bank –or several over time— who wished to remain anonymous.

The B.I.S. received the gold into its safekeeping for the nation that required the foreign exchange for the swap period. Swaps of this nature are renewable once the time runs out, so it is impossible to say for how long a swap will last. The central bank that undertook the swap would have to be certain that it could return the currencies to get the gold back at some point in the future. If that country defaulted, then and only then could the B.I.S. go ahead and sell this gold. Any sale in the open market would be trumpeted loudly to all as well as reported in the Press or by the World Gold Council, B.I.S. or I.M.F. As the gold has already been withdrawn from the B.I.S. the swapping central banks has achieved its objectives, which we speculate on below.  read full article here A Return to the Gold Standard, or Gold Behind Currencies – Part 5/5 - GoldSeek.com