FACTS ‘N’ FIGURES — The rise of gold swaps

The launch of the European Central Bank in July and the approach of European monetary union raise a number of interesting possibilities for gold in the official sector. At the same time, the lack of transparency in the activities of central banks in the gold market may be misleading traders, analysts and investors.

In the past few years, an increasing number of central banks have been managing their gold reserves in such a way as to improve the return on their holdings. These banks have been especially active in the gold leasing and swaps markets. In the past two years alone, Gold Fields Mineral Services estimates that the official sector has mobilized another 1,000 tonnes, bringing the amount of central bank gold in the market to more than 3,700 tonnes.

The lack of transparency in these arrangements has created the impression that more gold has been sold than is actually the case. Statistics from the International Monetary Fund (IMF) show that total gold holdings in the official sector have declined by only 921 tonnes, or 2.6%, over the past three years, from 34,781 tonnes at the end of 1994 to 33,860 tonnes at the end of 1997. This contrasts sharply with the perception that there has been a wave of central bank selling. There have been a number of high-profile sales from countries such as Argentina and Australia, and earlier this year the Belgians disclosed having sold 299 tonnes. But this latter sale was conducted through five other central banks, and IMF statistics would seem to indicate that gold from several of the other central bank “sales” has ended up in other official holdings.

The Bank of Portugal is one central bank that has admitted to using gold swaps as part of its policy to secure the maximum possible yield from its reserves, but it has not sold any gold. Likewise, the Austrian central bank makes no secret of its use of gold swaps and recently revealed that its holdings had “fallen” by 83.2 tonnes. Yet this decrease was not represented by outright sales; rather, it reflects an increase of 69.7 tonnes in gold swaps (which will return to reserves on maturity).

Gold swaps and deposits by the official sector have risen significantly in recent years to meet an increase in the demand for liquidity in the market.

These swaps and sales may have been misinterpreted as outright sales, thereby contributing to the negative market sentiment for gold.

— From a release issued by the Geneva-based World Gold Council.