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Did Greece Resort to Gold Swaps?

Another sign that gold could be making a monetary comeback...

LAST YEAR saw central banks pull 635 tonnes of gold from the Bank for International Settlements, according to the BIS annual report. This was the largest withdrawal in more than a decade, writes Julian Phillips of

The questions is: why? To answer it, let's first let's look at what Swaps are.

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. 

The Wall Street Journal informs us that the BIS 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 BIS 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 BIS 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, BIS or IMF. As the gold has already been withdrawn from the BIS the swapping central banks has achieved its objectives, which we speculate on below. 

The Bank for International Settlements did not disclose the reasons why the gold/currency swaps were initiated in the first place, nor have they disclosed why these transactions were reversed...

  • Some have speculated that they did not earn enough on the gold they lent out. Lending gold for six months earned a rate of 0.1% recently, according to benchmark market assessments published by the London Bullion Market Association. This is certainly not worth any risk at all.
  • Some say that it was central bank desires to keep their gold inside their vaults and not loaned outside it.
  • Some say that the gold is now being lent to the private sector for a better yield. This may well be true, but note that the risks have heightened well beyond the rewards they may earn. 

The BIS confirmed that the fall in the value of gold deposits disclosed in its annual report represented, 'a shift in customer gold holdings away from the BIS'. Comparisons with previous annual reports showed the withdrawal was the largest in at least 10 years. This implies that more than improved yields were involved. In our opinion, the return of gold to its original owners reflected the use of gold "in extremis".

It would be prudent for all such guardians of national reserves to have their assets in house. To us, this seems the most plausible reason and one all central banks would never dare express! Venezuela's example of repatriating its gold may well be followed shortly.

The financial crisis has led to a decline in the number of creditworthy counterparties and a reduction in credit lines that counterparties can offer. This is significant in a world where credit risk and debt problems have been the subject of bankers' fears since the appearance of the Credit Crunch. 

Recently, for someone in the trouble Greece is, gold swaps allow a central bank's reserves to be lent in a credit-secure fashion. In other words, a gold swap allows the lender of currency to benefit from greatly reduced credit risk, as the gold can be held in an allocated account, usually at the Bank of England via the BIS. The currency deposit is secured with this gold throughout the life of the deposit. 

The all-important question, "When should a swap be undertaken and when closed down?"

To answer this question we have to look at what Alan Greenspan meant when he described "Gold is money, in extremis". What are extreme times?

  1. At worst, they are when a nation has lost all credibility in financial markets and amongst the global community of nations.
  2. At best, it is when a nation is in need of help from the global community of nations.
  3. In between, it is when it has lost all credibility in financial markets, but looks likely to get help from the global community of nations.

Let's go back to 2009 and 2010. What made these years so different to others. Can they be considered extreme times?

Yes, they can. Greece in particular looked awful and could well have fallen into the first category but because it was a member of the Eurozone – into which it never should have been allowed— the Eurozone looked as though it would bail out the country. We are not saying it was Greece that entered into the swaps, but could have been alongside Spain and Portugal.

In the short term, Greece needed funding immediately and could not wait until it received assurances of help that would convince creditors. That was a perfect time for the use of the county's 111 tonnes of gold. Its use then would prevent a financial collapse of the country and the devastating impact on the Eurozone. 

A judicious use of the nation's gold then would – and we are sure did— allow the country to raise loans at bearable rates. It acted as a facilitator that went far beyond the Dollar value of the gold involved which was around $4 billion then. With debts considerably greater [$150 billion+] than this, you may say we are being disproportionate in our conjecture. 

We respond: the use of gold was not to place a certain Dollar value on the gold, but to raise immediately needed funding to cover the portion of the debt that was due. Further to this, creditors were fully aware of the damage to Greece that losing this gold would do to its future financial credibility. 

Greece's gold was an asset whose value was that it averted a crisis that just could not be measured in Dollar terms. The Dollar value of that catastrophe would have had to have been measured in terms of the Dollar value of its impact on the Eurozone, i.e. inestimable, plus the loss of the value of Greece's entire debt. That's why to value the gold at $4 to $5 billion is just ridiculous. 

Its value lay in the ability to avert the catastrophe.

The breakup of the Eurozone would have been littered with currency confidence crashes, bank collapses and tsunamis of capital flow, unless halted by exchange controls. In such an environment, in a decaying developed world, gold certainly helped to avert that by being used in the swaps. Gold, therefore, is a tremendous counter to these disasters.

By swapping the gold for currencies to cover the immediate needs, time was given for debt-distressed nations to raise funds from the EU to contain the crisis. 

What's clear too is that the swaps lasted only a year before they were unwound. In that time, it must have been possible to garner sufficient undertakings from lenders for creditors to hold off on collapsing Greece, Portugal and Spain. (This is an assumption and we cannot validate this as such information is not available outside the BIS)

Any country such including Portugal, Spain, Italy, the UK and the USA, et al, can follow this route. Please note that the Eurozone members are not allowed to sell their gold for fiscal reasons under Eurosystem rules; however, these are not sales, but swaps. So, of the utmost importance is just who swapped this gold? Could it be one or more of the countries we mentioned? 

The implications are that the collateral they were able to offer outside of gold just wasn't good enough, so they had to use their gold. This was major news for gold in the monetary system!

What is significant about these transactions is that gold was used in international settlements after so many decades of being sidelined in the monetary system! 

The transaction itself confirms that gold is being used in international settlements, which is a dynamic confirmation of gold's return to the monetary system. 

You may say that a "Swap" might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the BIS would have to decide either to keep the gold on its books or to sell it. 

This puts the transactions into an entirely different category. One or more of the developed world's central bank's credit was not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into a downward spiral, shaking the global financial system to its core. No wonder the BIS is keeping such a low profile!

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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