Central Banks Trapped Between (Gold) Rock and Hard Place

Jan 18 2012

Sometimes it’s easy to think that central banks are schizophrenic—on the one hand, they buy up as much gold as they can lay hands on—after all, who wouldn’t want the ultimate monetary anchor in the rough seas of fiat? On the other hand, though, we see news like this—that central banks are increasing their gold lending to keep market prices down and to keep banks afloat. What gives?

Jack Farchy, Commodity Markets Reporter for the Financial Times, writes this in his latest Central Banks Increase Gold Lending:

Central banks increased the amount of gold they lent for the first time in a decade in 2011, as they used their bullion reserves to help commercial banks raise US dollars.
Although central banks hold one-sixth of all the gold ever mined in their reserves, their activities in the bullion market are opaque, with not a single institution revealing its day-to-day operations. In addition to holding gold for their reserves, some central banks also trade the metal, lending it on the open market in order to obtain a yield.

According to Thomson Reuters GFMS (Gold Fields Mineral Survey), the amount of gold central banks lent jumped this year for the first time since 2000—when gold was amidst a decades-long bear market. Of course, we’ve heard

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testiomials Without moving a single ounce of physical gold, central banks can sell their pile over and over again—creating an infinitely tangled web of lenders, creditors, swappers, and traders.”

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