Central Banks Pull Most Gold In A Decade From B.I.S. Before The Fiat Currencies Hit The Skids.

By Jack Farchy
Financial Times, London
Thursday, July 7, 2011

www.ft.com/intl/cms/s/0/ce24275a-a8b5-11e0-b877-00144feabdc0.html

Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade.

The move, disclosed in the BIS's annual report, marks a sharp reversal from the previous year, when central banks added to deposits of gold at the so-called "bank for central banks" rather than lending it directly to the private sector amid growing concerns over counterparty risk.

Central banks and other official institutions collectively hold about 30,000 tonnes of bullion in their reserves, and many seek to earn an income on their gold by lending it out, just as any other currency.

However, demand to borrow gold has fallen sharply in the past decade, driving interest rates on gold lending to record lows.

Hedging by gold miners, which is typically structured to involve borrowing gold, was traditionally the largest source of demand. But since miners have cut back their hedging programmes to almost zero, the gold lending market, which is mediated by large bullion-dealing banks, has dwindled.

Lending gold for six months earned a rate of 0.1 per cent on Thursday, according to benchmark market assessments published by the London Bullion Market Association.

In response to e-mailed questions, the BIS confirmed that the fall in the value of gold deposits disclosed in its annual report represented "a shift in customer gold holdings away from the BIS."

"The Bank's gold deposit liabilities declined by around 635 tonnes between 31 March 2010 and 31 March 2011," it added. Comparison with previous annual reports showed the withdrawal was the largest in at least 10 years.

Traders said the move of gold holdings away from the BIS probably reflected a combination of factors.

Some central banks, unimpressed with the paltry interest rates on offer, may have taken the decision not to lend their gold at all.

"My perception is there's less and less gold being put out by the central banks into the gold market," said one banker.

However, some central banks may have rediscovered an appetite for lending gold to the private sector, which can earn higher rates depending on the credit rating of the counterparty and structure of the transaction.

"As commercial banks' balance sheets have started to look better, there may have been a switch back to lending to the private sector," said Philip Klapwijk, executive chairman of GFMS, a consultancy.

"Yield enhancement can be a powerful inducement to a central banker," an industry executive added.