Financial experts and analysts predict that the price of gold will explode over the next eighteen months. Investors are being advised to buy gold coins and other physical forms of gold as well as diversify their stock portfolios to include gold holdings. There are gloom and doom predictions of a second dip in the economy and an impending collapse of the U.S. currency system. If all of these things are to be believed, it is time to cash in everything for some gold bars and head to Fiji to ride out the economic storm.
Most people are a lot more cautious in their approach and they view the reports and advice with skepticism. However, when a commercial bank engages in a gold swap the magnitude of 380 tons, it might be time to start paying attention. That is just the amount of gold that the Bank of International Settlements (BIS) recently received in exchange for foreign currencies. It represents 20 percent of the annual gold production on the planet.
A gold swap is similar to a sophisticated pawn ticket transaction. The owner of the gold gives the precious metal to a pawn broker. The pawn broker provides the owner with a certain amount of cash, at a reasonable rate of interest, based on the perceived value of the gold. If the owner does not reclaim the gold within a certain period, the pawn broker becomes the new owner of the gold. The gold is used as leverage for money that is needed at the current time.
The media received word of the recent gold swap involving the BIS and publicized it as a threat to the market for gold. The fear is that a potential sale of this supply will flood the market with liquidity. Perhaps the bigger issue is what this transaction foretells for the country in which the seller is located. In terms of the gold market, there are regulations that the BIS must adhere to, namely the Washington Agreement.
Whoever entered into this transaction most certainly did not want to swap its gold, putting a most secure asset at risk. It was likely forced to do so due to lack of other options. Though it cannot provide the money directly to its government, it can use the money to bail out one of its major commercial banks. In transactions like this, the gold market signals larger economic issues, which can actually prove beneficial for gold.
Tags: gold investment, gold swapping