While terms vary from deal
to deal, on most straightforward collateralization the central bank would receive
close to 100 per cent of the market price of the gold when the arrangement was
made and would be liable for margin calls
if the price fell.
Collateralization
The
use of gold as collateral for foreign exchange
loans was pioneered between Italy and Germany in 1974 to tide the former over
a massive balance of payments deficit. That collateralization was between their
respective central banks but this practice has evolved into more complex swap
operations between a central bank and one or more commercial banks.
Such
deals are particularly useful in a short-term foreign exchange crisis, where the
sudden outright sale of the metal might undermine the price. It also enables producer
countries, such as South Africa, to hold gold off the market when the price is
weak.