(i) it can simply mean the
exchange of metal in one location for metal in another. For example, gold held
in New York with the Federal Reserve Bank may be swapped for gold held in London
with the Bank of England; no metal actually has to move.
(ii) ‘swap’ has increasingly
come to describe the simultaneous spot sale of gold with a forward transaction
to buy the same amount back at a later date. For governments and central banks
it has become a way either of raising cash to meet short contingencies or simply
to invest the money on an interest-bearing basis. The gold
itself has become an important source of liquidity to the market. The
swap technique has been used in particular by gold mining nations such as South
Africa, Brazil and the Philippines, which market their local production.
Instead of selling the gold outright they can swap it to provide immediate liquidity.
South Africa, for
example, entered into extensive swap programs from the 1970s onwards, often
using part of her reserves in addition to
the regular gold production that she was marketing. Swaps, usually for six months,
were either rolled over on maturity or, on occasion if the price was high, the
gold was partly sold and partly taken back into reserves. At the peak in the
mid-1980s South Africa was estimated to have as much as four hundred tonnes
of gold out on swaps. The
Reserve Bank of India also swapped gold for a stand-by loan from the Bank of
Japan in 1991 to tide it over a short-term foreign exchange crisis.
Central banks usually, though not always, indicate when they have swapped gold
by showing a drop in their published reserve figures in the International Financial
Statistics publication of the IMF; this is sometimes taken as an outright sale;
often it is not.
(iii) on futures
markets swapping can be used for rolling over or rolling forward
contracts.
Swaps
The word
‘swap’ has come to have several meanings in the physical gold market.