Gold Swap
A gold swap is a transaction in which one party exchanges gold for currency, usually US dollars, and commits to reverse the exchange at an agreed price on a future date. Economically it is a short-term loan secured on gold.
Also called: gold-for-currency swap · gold swap transaction · gold repo
The swap has two legs. On the first, the gold holder delivers gold and receives cash. On the second, at maturity, it returns the cash plus an agreed amount and takes its gold back. The difference between the two legs reflects the interest on the cash, less the return the lender can earn on the gold. The structure is the gold equivalent of a repo, and the IMF's statistical guidance treats gold swaps, like repos, as collateralised loans.
For a central bank, a swap is one of four ways to turn gold into usable currency, alongside selling it, lending it and pledging it as collateral. It raises dollars quickly without giving up ownership or locking in a price, and the gold can come back once the need passes. The ECB, for example, states that its monetary gold holdings are not affected by reversible gold transactions such as swaps, loans and deposits.
A swap needs a counterparty willing to take gold, in a form and place it accepts, which in practice usually means Good Delivery bars held in London. Gold kept at home or in non-standard bars is slower to mobilise. The lender applies a haircut, may call for more gold if the price falls, and in a crisis may simply be unwilling to deal. For anyone reading a country's reserves, swapped gold is a reminder that a holding can be counted twice: once as gold and once as the currency it raised.
In practice
Recording practice varies. Under IMF guidance a monetary authority may keep swapped gold inside its reserves, so a headline reserve figure can include gold that is committed to a counterparty until the swap unwinds.
Example
A central bank swaps gold worth US$1.2 billion at the day's price for US$1 billion for six months. At maturity it repays US$1 billion plus the agreed charge and receives the same quantity of gold back. If the gold price falls during the term, the counterparty can ask for more gold to restore its margin.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Gold Swap, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| FX swap | An FX swap exchanges one currency for another and reverses it later. A gold swap exchanges gold for currency; the gold acts as collateral for what is effectively a loan. |
See also
- Repurchase AgreementA repurchase agreement, or repo, is a short-term loan structured as a sale: one party sells securities for cash and agrees to buy them back later at a slightly higher price. The securities are the collateral and the price difference is the interest.
- FX SwapAn FX swap is a contract in which two parties exchange two currencies today and agree to reverse the exchange on a set future date at a rate fixed now. In economic terms it is a loan of one currency secured by another.
- HaircutA haircut is the percentage by which a lender discounts the market value of collateral when deciding how much to lend against it. A 2 percent haircut means US$100 of securities supports a loan of US$98.
- Monetary GoldMonetary gold is gold that a country's monetary authority owns and holds as a reserve asset. In IMF statistics it covers gold bullion, including allocated gold accounts, and unallocated gold accounts with non-residents that give a claim to delivery of gold.
- London Good DeliveryLondon Good Delivery is the LBMA standard for the large gold and silver bars traded in the London wholesale market. A gold Good Delivery bar holds between 350 and 430 fine troy ounces at a minimum fineness of 995.0 parts per thousand.
- Central Bank Swap LineA central bank swap line is a standing agreement under which one central bank lends its currency to another in exchange for the borrower's currency, so the borrower can supply foreign-currency funding to banks in its own jurisdiction.