Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

B.I.S. Gold/Currency Swaps and a Greek Drachma?

Commodities / Gold and Silver 2011 Jul 13, 2011 - 08:18 AM GMT

By: Julian_DW_Phillips

Commodities

In the last year, according to the B.I.S.'s annual report Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade. The move, disclosed in the BIS's annual report, marks a sharp reversal from the last year when central banks added to deposits of gold at the so-called "bank for central banks".


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 we note that the risks have heightened well beyond the rewards they may earn.

To know for sure, we need to be told by the B.I.S. themselves, and that is not likely to happen. Few except ourselves have suggested it had been loaned out as collateral. The return of the gold to the central banks involved -- in the light of the worsening international debt situation and the risks to international banks -- could easily have played a part.

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 reflects the higher risks out there for the banking system. No central bank will want it to be known that they have a creditor that cannot return their gold. Should the worst happen that the Eurozone membership changes, then the ensuing financial chaos calls for central banks to be able to cope with any dramas that might come their way.

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!

Extreme Times

One of the most difficult definitions to make is the definition of extreme times for central bankers. Are we in extreme times for most gold holding central banks based in Europe? We would think so, as the abilities of European Finance Ministers are falling short of what's needed to rectify the Eurozone debt crisis. Matters are worsening every day, and we haven't seen the worst yet. If matters do decay any further, or if Greece leaves the Eurozone and the Drachma is reinstated, then it will need all the help it can get from its central bank.

While the Greek government cannot instruct the central bank to compromise its independence (unless it leaves the Eurozone) in extreme times the central bank may, on its own initiative, step into the breach of international trade and use gold as collateral, to keep international trade flows moving. That is what really extreme times means.

With Greece, Ireland, Portugal, Spain and now Italy on the danger list of debt-distressed members of the Eurozone we are in extreme times in Europe. This would be gold's time!

So what can happen to make gold serve as more than its dollar value? Gold is money as a last resort amongst bankers. What would make them activate it?

Departing from the E.U.

We have to do more than sit and wait to see what happens. At the moment the gold price has shot up to €1,107 at Tuesday's Gold Fix in London, a record almost €30 higher than the previous peak. Confidence in the euro is crashing. It is clear that even Europe's Finance Ministers recognize that Greece is completely bust. Whichever way the country goes -- whether it is into austerity for the next decade or perhaps into a booming exit from the E.U. -- it is going to have an extremely hard time. If it does leave the E.U. then what does it do?

Take a look at Argentina, when it left the dollar peg and let the Peso drop. Argentina is still not welcome in the markets, but it benefitted more than it would have suffered if it had kept the dollar 'peg'. If Greece followed the same road it would have to reinstate the Greek Drachma at a hugely lower rate per Euro, so that its cheapness would attract euro-bearing tourists in droves. The banks would need to be saved by the forcible conversion of euro deposits to Drachmas at a lower level. Capital flows would have to be stopped or heavily penalized through a deep discount to the Drachma used for commercial transactions.

This would give rise to a Financial Drachma and a Commercial Drachma. New investors in Greece would be rewarded with the deep discount that would prevent money flowing out of Greece. Commercial transactions would follow the value of the Drachma established in trade with Greece. If foreign banks wanted to remove the blocks on their capital they would be asked to invest it in 10-year government bonds or bank deposits before it could be repatriated.

The big advantage to new investors would be that they would not simply earn good interest on their deposits but would see a capital profit of the deep discount at the end of 10 years, a boost to their interest income in the amount of the deep discount as income would leave the country as a commercial transaction.

With an economy not built to perform well by itself, the benefits of these changes would enhance the performance of the economy remarkably. Property investments would enjoy the deep discount on capital alongside the new tourist boom. Under any long term bailout none of these benefits would come to Greece.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2011 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

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-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips 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-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules