UPDATE – Bank of International Settlements registered biggest gold swap in history at 346 tonnes

Jul 6, 2010 - 12:44 PM GMT
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London, 06 July 2010 – The Bank of International Settlements has registered the biggest gold swap in history at 346 tonnes, which points to a central bank in strong need of funds, according to a report on Tuesday.

In its 2010 annual report, the BIS said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold," stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.

"The bank has an obligation to return the gold at the end of the contract," it added.

The Switzerland-based BIS effectively serves as a bank for central banks – it has 56 member central banks. Swaps are financial instruments that allow for the exchange of one asset for another – in this case, gold for currency.

While the data is relevant to the end of BIS’ 2010 financial year in March, data posted to the International Monetary Fund and carried by Bloomberg show the swap still growing in April, analyst Andy Smith of Bache Commodities noted.

To now, this implies a swap of about 380 tonnes from the end of 2009, he said in a report, although a similar calculation by Matthew Turner, precious metals strategist at Mitsubishi Corp put the figure at a slightly lower 349.56 tonnes.

"This is the biggest gold swap in history, raising a non-negligible, even macro $14 billion or 10 billion euros," he said. "It’s usually only when the going gets really tough that the gold gets going/mobilised in size."

"Greece does not have anything like the gold already swapped at the BIS (it holds only 112 tonnes). But Portugal does, almost to the ounce," he said. "More vivid imaginations… might even see some role for the ECB here."

There are 14 banks central banks that hold 346 tonnes or more of gold, with the US in the top spot with 8,133 tonnes. Germany has 3,406 tonnes with the IMF while Italy and France have upwards of 2,400 tonnes.

China and Switzerland both hold slightly more than 1,000 tonnes of gold followed by Japan (765 tonnes), Russia (669 tonnes) and the Netherlands (613 tonnes). After this comes India (558 tonnes), the ECB (501 tonnes) and Taiwan (423 tonnes). Portugal is next with 382 tonnes, according to the latest World Gold Council data.

"A gold swap… would satisfy the letter of the Lisbon Treaty ‘no bail out’ clause because repayment would be in full at maturity. And it would have the added attraction of being under the radar," Smith added.

And in the last Central Bank Gold Agreement (CBGA), a treaty used by European central banks to regulate their gold holdings that was set in September 2009, members "presciently dropped the clause… prohibiting signatories from opening new gold derivatives [such as swaps]," he added.

But while suspicion turns automatically to debt-laden European nations that might need liquidity fast – Portugal, Ireland, Greece and Spain in particular – there is no proof that the swap relates to the actions of one central bank alone, a senior executive at a large market making bullion bank said.

"If it’s one country, it is clearly much easier to spot but if it’s several countries it’s not," he said. "I’m not sure how it would be reflected on the central bank's books or if it would be reflected because as far as I am aware gold doesn’t change hands [for book-keeping purposes]."

"However, it is a large amount of gold and not many countries have that much gold. If it is a total of 346 tonnes it can be only 14 countries – it wouldn’t be showed on IMF records either," he added.

(Additional reporting by Clara Denina. Editing by Mark Shaw)