Secret gold swap has spooked the market

By Garry White and Rowena Mason

The Daily Telegraph, United Kingdom
11 Jul 2010

It takes a lot to spook the solid old gold market. But when it emerged last week that one or more banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies, there was widespread surprise and confusion

The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world's annual gold production and the possibility of a sell-off. In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold, compared with nothing the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month. Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. It appears to have raised $14bn for whoever's been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market. Denominated in euros, gold has fallen 8pc since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce. The big gold exchange traded funds (ETFs) – having peaked at record inflows in May – have also been showing net outflows over the past few days. Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash – curious about who is using their stash of precious metal for what looks suspiciously like a secret bailout. At first it looked like the BIS was swapping gold with a troubled central bank. After all, the institution is the central bankers' bank and its purpose to conduct transactions with national monetary authorities. Central banks in the troubled southern zone of Europe were considered the most likely perpetrators. According to the World Gold Council, central banks in Greece, Spain and Portugal held 112.2, 281.6 and 382.5 tons of gold respectively in June – leading analysts to point fingers at Portugal, or a combination of the three. But Edel Tully, an analyst from UBS, noted that eurozone central banks would be severely limited with what they could do with the influx of extra cash – unable to transfer it straight to governments or make use of the primary bond markets. She then listed the only other potential monetary authorities with enough gold as the US, China, Switzerland, Japan, Russia, India and Taiwan – and the International Monetary Fund. This led to musings that the counterparty was the IMF, making sense because the lender of last resort is historically prone to cash shortages and has been quietly selling off gold in the first half of the year. Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency. "Gold swaps are usually undertaken by monetary authorities," he writes on his industry blog, MineSet. "The gold is exchanged for foreign exchange deposits with an agreement that the transaction be unwound at a future time at an agreed price. "The IMF will pay interest on the foreign exchange received. Historically swaps occur when entities like the IMF have a need for foreign exchange, but do not wish to sell the gold. In this case, gold is a leveraging device for needed currency to meet requirements. "The many reports that characterise the large IMF gold swap as a sale of gold into the markets do not understand the difference between a swap and a lease." However, the day after original reports about the swaps, BIS emailed a statement saying that the swaps had not been conducted with monetary authorities but purely with commercial banks. This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet. In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority. This would add an extra layer of anonymity. "So the BIS swaps look like a tripartite transaction," writes Adrian Douglas of the Gold Anti-Trust Association. "The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS." Analysts for Commerzbank note that in the meantime, "The price of gold is tending weaker at present."

Fed Officials Avoid Talk of Further Stimulus to Stoke Growth

Bloomberg, July 1, 2010

Federal Reserve policy makers expressed caution about the outlook for the U.S. recovery and bank lending without backing any new steps by the central bank to stimulate growth. Atlanta Fed President Dennis Lockhart said yesterday that while the recovery isn’t sustainable enough yet to warrant raising interest rates, he doesn’t see a need for additional asset purchases to aid the economy. Fed Governor Elizabeth Duke said it may take years to return to pre-recession credit levels and that there’s “no single step” to unclog lending markets. U.S. central bankers are sticking to their 18-month policy of leaving the benchmark interest rate near zero with the European debt crisis sapping investor confidence and U.S. stocks plunging to their lowest close since October. Last week Fed officials renewed a pledge to keep the rate at a record low for an “extended period.” “The underlying conditions are probably less robust than was generally expected,” said Keith Hembre, Minneapolis-based chief economist at U.S. Bancorp’s FAF Advisors Inc., which oversees about $91 billion. At the same time, “I don’t think there’s any evidence yet at this point that suggests that they are going to be so weak that it will put further downward pressure on inflation and upward pressure on unemployment to the degree that it would necessitate further creative easing on the part of the Fed,” Hembre said.
Stocks Fall
The Standard & Poor’s 500 Index fell 1 percent to 1,030.71 after Moody’s Investors Service warned that it may downgrade Spain. Yields on two-year Treasury securities touched a record low earlier yesterday of 0.5856 percent before rising to 0.60 percent. Two days ago, Fed Chairman Ben S. Bernanke met with President Barack Obama at the White House. Afterward, Obama said the U.S. economy is strengthening even as it faces “headwinds” from the European debt crisis and that Bernanke shares his view that the economy is growing stronger. Bernanke said he and Obama talked about how the U.S. economy is being affected by events in Europe, without elaborating. The day before, Fed Governor Kevin Warsh, appointed in 2006 by then-President George W. Bush, a Republican, said any decision by the central bank to expand its $2.35 trillion balance sheet must be subject to “strict scrutiny.” Lockhart told reporters yesterday after a speech in Baton Rouge, Louisiana, that he respects Warsh’s view.
‘Long-Term Credibility’
“Whenever you are purchasing government obligations in the current conditions of deficits and rising national debt, you have to think about the long-term credibility, which I think was Kevin’s point,” Lockhart said. Chicago Fed President Charles Evans said yesterday in an interview with CNBC that the debt crisis in Europe has “definitely imposed additional risks on the U.S. recovery.” In a speech to the Rotary Club of Baton Rouge, Lockhart said there’s a “small risk of deflation,” and the recovery faces threats from Europe’s debt crisis, drops in state and local spending, commercial real estate losses and the Gulf of Mexico oil spill. “Recent developments make me even more convinced that current policy is appropriate,” Lockhart said. “Financial markets and many businesses are more nervous today than a few weeks and months ago, and it’s my view that monetary policy makers should hold to a guarded policy stance and evaluate carefully the risk and reward of a change of policy.”
Hoenig’s Dissent
The remarks were some of the most downbeat on the U.S. economy from a Fed official in recent months. Lockhart, 63, doesn’t vote on Federal Open Market Committee decisions this year. Kansas City Fed President Thomas Hoenig has called for an increase in the Fed’s benchmark rate within months and has dissented from four FOMC decisions this year. The Fed has left the overnight interbank lending rate target at a record low of zero to 0.25 percent since December 2008. Central bankers are concerned that persistent unemployment May hamper the recovery. The Labor Department will report on July 2 that unemployment rose to 9.8 percent in June from 9.7 percent in May, according to the median forecast of economists in a Bloomberg News survey. Recent economic data have pointed to weakness in housing and consumer spending.
Consumer Confidence
Consumer confidence sank in June more than forecast as Americans became distressed over the outlook for jobs and incomes, a June 29 report from the New York-based Conference Board showed. Sales of new homes fell in May to the lowest level on record, the Commerce Department said June 23. Two days later, the agency lowered its estimate for first-quarter economic growth to an annual pace of 2.7 percent from 3 percent to reflect a smaller gain in consumer spending and a bigger trade deficit. While U.S. financial firms have “rather small and manageable direct exposure to the Greek government” and other European sovereign borrowers, there’s still a risk that financial-market pressures may be transmitted to the U.S. economy and that a stronger dollar may weaken demand for exports, Lockhart said. For state and local governments, budget gaps are likely to widen in 2010 and 2011, with one unspecified estimate of the combined deficit for all states this year at $144 billion, Lockhart said. “This situation is our nation’s very immediate analog of the public finance pressures being felt in Europe,” he said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Jobless Claims in U.S. Increased Last Week to 472,000

By Bob Willis
July 1, 2010 (Bloomberg) -- More Americans unexpectedly applied for jobless benefits last week, a sign the labor market recovery may be slowing. Initial jobless claims increased by 13,000 to 472,000 in the week ended June 26, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance rose, while those getting emergency benefits dropped after Congress failed to act on extending the legislation. The jump in applications raises the risk that the turmoil in financial markets brought on by the European debt crisis is leading to additional cutbacks in staff. The Labor Department tomorrow may report the U.S. lost jobs in June for the first month this year, reflecting a drop in temporary federal workers who helped to conduct the decennial census. “The labor market is not generating employment for anyone, even for people who have been out a long time,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York, who forecast claims at 470,000. “What we’re seeing in the backup of claims is not a particularly healthy story, showing we can’t generate upside momentum in the labor market.” Economists forecast jobless applications would fall to 455,000 from an initially reported 457,000 for the prior week, according to the median of 46 projections in a Bloomberg survey. Estimates ranged from 440,000 to 475,000.
Stock-Index Futures
Stock-index futures extended losses and Treasury securities were little changed after the report. Futures on the Standard & Poor’s 500 Index expiring in September dropped 0.4 percent to 1,022.8 at 8:45 a.m. in New York. The yield on the 10-year Treasury note rose was 2.93 percent, the same as late yesterday. This is the time of year when states cut back on payrolls in schools, a Labor Department spokesman said. The jump in claims may reflect even larger-than-typical reductions. Another report today showed job cuts announced by U.S. employers fell in June. Planned firings dropped 47 percent to 39,358 from 74,393 in June 2009, according to figures released by Chicago-based Challenger, Gray & Christmas Inc. It was the third straight month that announced reductions totaled less than 40,000. For the first half of the year, announced job cuts totaled 297,677, the lowest six-month tally since 2000. Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.
Four-Week Average
The four-week moving average, a less volatile measure than the weekly figures, climbed to 466,500, the highest level since March, from 463,250 the prior week, today’s report showed.
The number of people continuing to receive jobless benefits increased by 43,000 in the week ended June 19 to 4.62 million. The continuing claims figure does not include the number of Americans receiving extended or emergency benefits under federal programs. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments plunged by about 376,000 to 4.92 million in the week ended June 12. The Labor Department estimates about 3.3 million people will fall off extended-benefit rolls by the end of July if Congress doesn’t pass emergency legislation. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.6 percent in the week ended June 19. Forty states and territories reported a decrease in claims, while 13 reported an increase. These data are also reported with a one-week lag.
Employment Forecast
The Labor Department tomorrow may report payrolls fell by 125,000 in June, reflecting cuts in temporary census workers as the decennial survey nears completion, economists surveyed by Bloomberg forecast. Private payrolls, which are more revealing of labor-market conditions, probably rose by 110,000 after a 41,000 gain the prior month. A report yesterday showed companies added 13,000 workers to payrolls in June, the smallest gain since February, according to figures from ADP Employer Services. Economists surveyed had forecast a gain of 60,000, according to a Bloomberg survey median estimate. The economy lost 8.4 million jobs during the recession that began in December 2007, the biggest employment slump in the post-World War II era. From January through May, company payrolls grew by 495,000 workers.
Federal Reserve
Federal Reserve policy makers last week reiterated a pledge to keep the benchmark interest at a record low for an “extended period” and signaled the fallout from the European debt crisis poised a risk for economic growth. They acknowledged the labor market was “improving gradually,” even as employers are reluctant to boost hiring. The timing of the traditional summer auto-plant shutdowns to retool equipment for new models may reduce claims in coming weeks. General Motors Co. said June 17 most of its U.S. plants will remain open during the traditional shutdowns, a move that economists said could lower claims because some temporarily suspended workers usually apply for benefits.
--With assistance from Timothy R. Homan in Washington. Editors: Carlos Torres, Vince Golle
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net