Tags: Central | Banks | Gold | Hoard | borrow | Cash

Central Banks Use Gold Hoard to Borrow Cash

By Dan Weil   |   Tuesday, 13 Jul 2010 01:35 PM

Central banks are using their gold supply as collateral to borrow money from the Bank for International Settlements (BIS), which acts as a central bank for central banks.

They are technically engaging in swaps with the BIS, The Wall Street Journal reports. The banks give the BIS gold in exchange for cash and agree to buy back the gold at a later date.

The banks borrowed a record $14 billion in the first three months of this year from the BIS, giving it 349 metric tons of gold in return, according to the latest BIS data.

And figures indicate the banks swapped another 32 tons of gold in April, Andy Smith, senior metals strategist at Bache Commodities Group, told the Journal.

Central banks are eager to buttress their cash supply because of the spreading sovereign debt crisis. Liquidity tightened in the financial system as Europe’s debt woes unfolded.

Pimco fund manager Nicholas Johnson points out that the central bank moves call into question gold’s status as a safe haven investment.

"Originally sovereign financial troubles were taken as unambiguously bullish" for gold, he told the Journal.

"But some are now rethinking this if the gold that sovereigns hold has been pledged as collateral to someone else who has more ability to liquidate those holdings."

Gold rose nearly 2 percent to a high of $1,217.60 an ounce in Europe on Tuesday after a ratings agency downgrade of Portugal boosted the metal's appeal as a haven from risk and a hedge against currency market volatility.

Spot gold was bid at $1,213.90 an ounce, against $1,194.85 late in New York on Monday, Reuters reported. U.S. gold futures for August delivery rose $15.90 an ounce to $1,214.60.

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Central banks are using their gold supply as collateral to borrow money from the Bank for International Settlements (BIS), which acts as a central bank for central banks. They are technically engaging in swaps with the BIS, The Wall Street Journal reports. The banks give...
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