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Bank of International Settlements says on its 2010 annual report that it holds 346 tonnes of gold from gold swaps with other counterparts. The figure was nil in 2009 and apparently it has gone up to 382 tonnes since the report was released. So what does this mean? Swaps are financial instruments that allow the exchange of one asset to another. In this case it has been physical gold for a currency. Gold swaps are usually undertaken by central banks, one central bank agrees to swap gold for foreign exchange deposits with an agreement that the gold will be sold back to them in the future at an agreed date and price. Gold swaps usually happen when the cash-taking bank wants foreign exchange but doesn't want to sell its own gold holdings. The Wall Street Journal notifies that the swap has been made between B.I.S and commercial banks. We know that none of the commercial banks have 382 tonnes of gold on their books. From this we can conclude that it is likely that commercial banks have made a deal with one or more of the central banks and they are acting on their behalf since they want to stay anonymous. Swaps like these are renewable after the agreed time expires, therefore it's impossible to estimate how long the swap will last. The central bank, which requested the swap, must be certain that it can reclaim the gold back at some point in the future. If it can't, only then B.I.S can sell the gold. Any sell of this scale would be loudly proclaimed in the markets and reported in the press. In the current economic situation where the sovereign dept risk is on everyone's lips, gold swaps allow a central bank's reserves to be lent in a credit-secure fashion. In other words, the lender can benefit from greatly reduced credit risk since the gold can be held in an allocated account, usually at the Bank of England. Any of the countries, which are struggling to keep their credit rankings, could follow this route. Practically this would concern Ireland, Portugal, Spain, Italy, the U.K. and the U.S.A. Sales are not permitted under Euro system for fiscal reasons but we are talking about swaps now. If the swap was made by one of these countries, it would be major news for the monetary system because the collateral that the country offered weren't just good enough so they had to use their gold. The most significant factor in this or these swaps is that gold is used in international settlements after being sidelined for many decades in the monetary system. This confirms that gold is back in business. If the lender fails in reclaiming the gold back, B.I.S has to decide between selling the gold forwards or keeping it on its holdings. Keeping the gold on its books would back up the assumption that the gold is again active in the monetary system. What appears to have happened is that one or more nations have some shortfall in its accounts and they needed foreign exchange to counter it. If the nation/nations fail to return the funds to

B.I.S then it would have to decide whether to place the gold with another central bank or alternatively keep it on its books. This would put the transaction into a whole new category since it would mean that one or more of the developed world's central bank's credit is not good enough for other governmental institutions. If someone finds out which country this is, it would put the global financial market into a quite spin. No wonder B.I.S is trying to keep a low profile.

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BIS Gold Swap – Gold Is Back In The Game

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