Last week, Commodity Online had reported that several central banks had pawned their gold reserves to the Bank for International Settlements (BIS) to raise cash and this may impact the gold market in the coming days.

That prediction has come true with gold price showing a correction by falling below $1,200 for the first time in more than a month.

As the news spread, concerns on whether the BIS could potentially sell on this vast cache of bullion in the event of a default flooded the market. 

READ & DISCUSS: Central banks' gold with BIS?

After this, gold has fallen 8 per cent since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce. The big gold exchange traded funds (ETFs) - having peaked at record inflows in May - have also been showing net outflows over the past few days.

Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash - curious about who is using their stash of precious metal for what looks suspiciously like a secret bailout.

At first it looked like the BIS was swapping gold with a troubled central bank. After all, the institution is the central bankers' bank and its purpose to conduct transactions with national monetary authorities.

Central banks in the troubled southern zone of Europe were considered the most likely perpetrators. According to the World Gold Council, central banks in Greece, Spain and Portugal held 112.2, 281.6 and 382.5 tonnes of gold respectively in June - leading analysts to point fingers at Portugal, or a combination of the three.

However, BIS emailed a statement saying that the swaps had not been conducted with monetary authorities but purely with commercial banks. This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.

A swap agreement is nothing more than a sophisticated version of a pawn ticket. The owner of the property leaves his valuable with the pawnbroker. In turn the pawnbroker offers cash against the item's perceived value. If, in time, the owner fails to reclaim the property, ownership transfers to the pawnbroker.

As far as the gold market is concerned, even if the BIS is forced to liquidate the gold at some point down the road, it has to be done under the auspices of the Washington Agreement. The BIS has pledged to abide by that agreement even if it isn't a direct signatory.

Under current circumstances any central bank selling, swapping, or even leasing its gold is not doing it because the bank likes the idea. After all, the bank thus puts at risk the one asset that rises above the tangle of counterparty and systemic risk. If a central bank is pawning its gold, it is because the pawner is runnning out of choices or even has been forced to put its gold on the dock.

Portugal stands in no different a position than Greece did when it hit the wall several months ago. Portugal cannot print money, so its options are limited. Leaving aside the questionable assertion that money raised through the swap could not go directly to the federal government or to buttress the bond market, it unquestionably could go to bail out a major commercial bank and forestall a rolling counterparty meltdown.