Is it just a coincidence that Portugal has (or had) 382 tonnes of gold in reserve and that the amount of gold the Bank for International Settlements recently inventoried via a swap arrangement was 380 tonnes?
Let’s put 2+2+2+2+2 together here. (Nothing in the gold market is ever simply 2+2.)
I don’t know how many of you watch the „Pawn Stars“ on the History Channel, but if you don’t, let me introduce you to the key question asked of anyone who brings something into the store:
Do you want to „pawn it“ or „sell it“?
A swap agreement is nothing more than a sophisticated version of a pawn ticket. The owner of the property leaves his valuable with the pawnbroker. In turn the pawnbroker offers cash against the item’s perceived value. If, in time, the owner fails to reclaim the property, ownership transfers to the pawnbroker.
In the case of the BIS and our subject pawner, the gold is left with the pawnbroker, who issues cash — in this case, probably in the form of euros.
At the moment there’s no way of knowing if Portugal is the party pawning the family jewels at the BIS, but I rather doubt that, as some have suggested, the BIS suddenly went from zero tonnes of gold on its balance sheet to (remarkably) 380 tonnes by piece-mealing hundreds of little gold deals with commercial banks around Europe because of the financial crisis. That’s a smokescreen. At the same time, Portugal has been identified as one of the European nations in deep financial trouble (a PIIG, if you will). Some analysts believe that Portugal may be the next domino to topple in the European theater.
The real question with respect to the pawn is not as the mainstream press has posited it, a threat to the gold market. It has more to do with what this swap portends for Europe.
It did not come from nowhere. It is not some inexplicable event that simply happened. Something else is going on, the full portent of which we do not yet fully understand.
No one throws gold around like an old suit of clothes, and we need to keep that in mind.
As far as the gold market is concerned, even if the pawn shop (the BIS) is forced to liquidate the gold at some point down the road, it has to be done under the auspices of the Washington Agreement. The BIS has pledged to abide by that agreement even if it isn’t a direct signatory. Because it is so charged (which includes a nod toward gold market transparency), I will take the BIS at its word when it says that it is holding the gold under a swap arrangement for future redemption — another clue that it hasn’t come from far and wide but probably from one source.
Under current circumstances any central bank selling, swapping, or even leasing its gold is not doing it because the bank likes the idea. After all, the bank thus puts at risk the one asset that rises above the tangle of counterparty and systemic risk. If a central bank is pawning its gold, it is because the pawner is runnning out of choices or even has been forced to put its gold on the dock.
Don’t forget: Portugal (if it is indeed the pawner here) stands in no different a position than Greece did when it hit the wall several months ago. Portugal cannot print money, so its options are limited. Leaving aside the questionable assertion that money raised through the swap could not go directly to the federal government or to buttress the bond market, it unquestionably could go to bail out a major commercial bank and forestall a rolling counterparty meltdown.
By all this the gold market could once again be signaling much wider economic problems than what appears on the surface, just as the ministrations of British Chancellor Gordon Brown with respect to gold hinted at problems deep within the British banking system in 1999, as well as an imminent increase in gold’s price. This writer formulated the Gordon Brown Gold Market Rally Indicator, which predicted a series of gold market run-ups.
In the same way, this situation at the BIS, when all the facts are in, eventually might accrue to gold’s benefit. Deductive logic leads one to draw certain conclusions, if only by the circumstantial evidence. It is no surprise to me that the swap appeared as small print on the BIS‘ balance sheet. I would not have expected this situation to make headlines.