Gold Required As Collateral By The BIS (Central Banks’ Central Bank)

I have a question. If gold is a ‘barbaric relic’ and isn’t money, then why is the central banks’ central bank (the BIS) only willing to do a swap transaction with commercial banks if they post gold as collateral? I mean, if the commercial banks default on the swap, the BIS (Bank of International Settlements) will simply be left holding a useless rock. Or could it be that gold is not only money, but that ¬†“gold still represents the ultimate form of payment in the world” as Alan Greenspan told Congress in 1999?

Three big banks — HSBC, Societe Generale, and BNP Paribas — were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads.

The mystery of who was involved in deals with the BIS, the bank for central banks, and what they were doing, has become clearer.

The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits they were taking from the Basel-based institution.

In a gold swap, one counterparty, in this case a bank, sells its gold to the other, in this case the BIS, with an agreement to buy it back at a later date.

The gold swaps were, in effect, a form of collateral against the US dollar deposits placed by the BIS with commercial banks. Gold is widely regarded as one of the safest assets, but has not been widely used as collateral in the past. Mr Caruana described the transactions as “loans with a guarantee.”

George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: “The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity. The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral.”

Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee.

Did you read those last two sentences? Anyone who holds gold in unallocated accounts at commercial banks may be out of luck if their banks pledge their gold as collateral for a swap with the BIS and can’t afford to reverse the swap when the time comes. That means your gold would then belong to the BIS. Once again, when the currency crisis takes off, if you can’t physically touch your gold, you don’t really own it.

The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts,” which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts,” which give banks access to their bullion for their day-to-day operations.

Financial Times


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