All that glitters

Gold and crime go hand in hand… The schemes that spook the gold trade can’t be sorted out so simply. They are the shadowy events, the phantoms rippling through the tall grass of the business, not clearly visible or understood, and sowing panic for that very reason. One such passage shook the market for two weeks in July 2010, when a massive, unexplained transaction parked a load of bullion in a place where those who monitor such movements did not expect to find it.

When they discovered it, their confusion about why it was there was deepened by the stubborn silence of a little known Swiss bank, The Bank for International Settlements, or BIS. Headquartered in Basel, BIS is sometimes called the central bankers’ bank, because that’s where they go to borrow. … The cause of the panic was a footnote to the bank’s annual report. The note revealed that a bank or group of banks had lent 349 metric tons of gold to BIS in exchange for cash. The deal was so colossal — a sixth of the world’s annual production — that the news of it, without elucidation, stunned the bullion market. Who had lent the gold, and why? Was a bank in trouble? Could it be a central bank? What did they know that the bullion market didn’t? As questions thickened the air, investors started bailing out of gold, and the price lost $40 in a day. 

Here’s why the price went down. The deal looked like a swap — an exchange of gold for cash, with an agreement that the gold would be redeemed at a later date… For whoever swapped it, the gold raised $14 billion. What bothered the gold market was the question of what would happen to the gold if the $14 billion didn’t get paid back. The price was down anyway, depressed by a period of selling by ETFs. Would the 349 tons suddenly appear for sale if the swapper couldn’t manage the loan? A 380-ton gold dump would annihilate the price.

Suspicion swirled about who might need the cash. There were plenty of candidates. Fear of European countries reneging on their debts was in the air already, and this fear suggested an explanation for the swap. A central bank desperately needed cash.

For a while, that’s what everyone I spoke to thought — Greece or Spain or some other monetary basket case was being hooked up to life support. But then Edel Tully, an analyst at UBS, pointed out that it couldn’t be a central bank. European regulations, she said, did not allow a central bank to transfer funds to its government or to buy the government’s bonds — the actions they would have to perform to stave off a default. Not a central bank, then, but some other monetary authority. On her list of suspects, Tully placed the International Monetary Fund. Suspicion switched to the IMF.

The fund is the world’s banker of last resort. It had bailed out Iceland, the first sovereign meltdown of the financial crisis. The IMF had been “quietly selling off its gold” position anyway, according to the Telegraph… No sooner did opinion settle on the IMF, than the BIS itself torpedoed it. It was not the IMF, or even a central bank, that had swapped the bullion, they said in Basel, but a commercial bank or banks. If this announcement was supposed to calm the market, it failed.