The Gold Mystery

There’s an odd mystery going on in the world’s gold market. The Bank of International Settlements revealed that it has a huge amount of gold compared with nothing a year ago.
It turns out that someone sold the BIS the equivalent of one-fifth of the world’s annual production of gold in exchange for $14 billion cash.
So now the question is, whodunit?
The implication is that some central bank was desperately short cash and they’re dumping grandma’s silver (well, gold) to bail themselves out.
The unusual suspects would be central banks in southern Europe. The hitch is that those banks don’t have a lot of latitude in what they can do with extra cash. Another suspect is the International Monetary Fund.

Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency.

Sinclair is the person who offered a $1 million bet in April 2008 that gold would rise to $1,650 an ounce by the second week of January 2011. We’re now just six months away.
At the time, gold was going for $900 an ounce. It’s up to around $1200 so it still needs a good rally to hit Sinclair’s target. Even if he doesn’t get the price right, he did call the rally.
The problem is that BIS said the deal wasn’t done with a central bank but with a private commercial bank.

This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.
In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority.
This would add an extra layer of anonymity. “So the BIS swaps look like a tripartite transaction,” writes Adrian Douglas of the Gold Anti-Trust Association. “The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS.”

Posted by on July 12th, 2010 at 9:45 am


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