UBS precious metals analyst Edel Tully takes a stab at making sense of the mysterious BIS gold swap, revealed in headlines on Wednesday.
In particular, she attempts to determine which institution could possibly be behind it.
Initial suspicion, of course, has fallen on the peripheral-state central banks, due to their well-publicised liquidity travails. Tully even finds that their gold holdings conveniently match the sum of gold reportedly swapped at the BIS (346 tonnes).
But it’s no smoking gun, she adds.
There are other factors that suggest it might not be a eurozone central bank. After all, what can central banks actually do with liquidity that’s received in this manner?
As Tully notes there are clear rules of engagement that might limit the usefulness of any such liquidity tapped. She explains as follows:
As significant as this action is for the gold market, it also has wider market implications. If the basis for this trade is to raise foreign exchange liquidity, what does the central bank then do with this cash injection? Europe’s Economic and Monetary Union imposes many restrictions.
While a Eurozone central bank can engage in this transaction with the BIS, it is illegal for the central bank in question to subsequently make a transfer to its government.
What about national central banks buying bonds? This is legal only so long as it is done in the secondary market – buying bonds in the primary market is strictly prohibited. This also applies to the ECB. My fixed income colleague Justin Knight notes that Eurozone secondary-market bond activity prior to May has not been unusual; there are, moreover, limits on how much a central bank can buy in each market. A Eurozone central bank therefore may not have been involved.
So if it’s not a eurozone central bank who else could it be?
Tully presents the following possible candidates:
What about non-Eurozone monetary authorities? The list of potentials is long, though single institutions with gold reserves exceeding 380 tonnes outside of Europe are limited to US, the IMF, China, Switzerland, Japan, Russia, India, and Taiwan.
And it’s particularly interesting to see the IMF on that list.
The institution — known for its own revenue shortfalls — has been proactively selling off part of its gold reserves since last year. Some 403.3 tonnes of gold, to be exact.
As of February it still had 191 tonnes worth of gold to sell. Tully points out that since then the BIS added 189 tonnes worth of gold swaps to its balance sheet.
Could the gold swaps partly then, be some type of IMF bridging loan?
And, given the IMF appears to have had some difficulty with its planned gold sales, that theory might make sense. As the FT reported in February:
Sri Lanka and Mauritius made small purchases from the IMF and speculation that China would follow was widespread. But the IMF’s announcement on Wednesday that it has not found further buyers for the remaining 191.3 tonnes it wants to sell – equal to about 5 per cent of annual global demand – signals that other central banks are not ready to buy. Or not publicly, at least.
Of course, there’s also the possibility it could be a private institution acting via a central bank as well.
We guess that for the time being the mystery continues.
Related links:
Some BIStoric gold swaps - FT Alphaville
Gold swaps versus gold loans - IMF Committee on Balance of Payments
Central banks swap tons of gold to raise cash, surprising market – WSJ
European banks use gold reserves to raise cash – FT