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Robert Lambourne: BIS has nearly ended its gold swap business
By Robert Lambourne
Tuesday, August 9, 2022
According to its just-published statement of account for July, the Bank for International Settlements has nearly ended its gold swap business, which it has been operating since 2009.
The July statement --
-- shows that the bank's gold swaps fell from 202 tonnes as of June 30 to just 56 tonnes as of July 29. Last July the bank's gold swaps stood at 502 tonnes, a decline of 89% for the year.
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The decline hastened substantially in February this year, possibly corresponding with the increasing compliance of bullion banks with "Basel III" regulations on collateral for the banks' obligations in gold.
Once again it is evident that the BIS remains an active trader of significant volumes of gold swaps on a regular basis, and the latest data shows that the downward trend in the bank’s swaps is accelerating. If the current rate of decline is maintained, the BIS may be carrying no gold swaps at all by the end of the year, or even by the end of this month.
But the BIS is unlikely to provide any explanation for its use of gold swaps.
... Historical context ...
The BIS rarely comments publicly on its gold activities, but its first use of gold swaps was considered important enough to cause the bank to give some background information to the Financial Times for an article published July 29, 2010, coinciding with publication of the bank's 2009-10 annual report.
The general manager of the BIS at the time, Jaime Caruana, said the gold swaps were "regular commercial activities" for the bank, and he confirmed that they were carried out with commercial banks and so did not involve central banks.
It also seems highly likely that the BIS' remaining swaps are still all made with commercial banks, because the BIS annual report has never disclosed a gold swap between the BIS and a major central bank.
The swap transactions potentially create a mismatch at the BIS, which may end up being long unallocated gold (the gold held in BIS sight accounts at major central banks) and short allocated gold (the gold required to be returned to swap counterparties). This possible mismatch has not been reported by the BIS.
The gold banking activities of the BIS have been a regular part of the services it offers to central banks since the establishment of the bank 90 years ago. The first annual report of the BIS explains these activities in some detail:
A June 2008 presentation made by the BIS to recruit central bank members at its headquarters in Basel, Switzerland, noted that the bank's services to its members include secret interventions in the gold and foreign exchange markets:
The use of gold swaps to take gold held by commercial banks and then deposit it in gold sight accounts held in the name of the BIS at major central banks doesn't appear ever to have been as large a part of the BIS' gold banking business as it has been in recent years.
As of March 31, 2010, excluding gold owned by the BIS, there were 1,706 tonnes held in gold sight accounts at major central banks in the name of the BIS, of which 346 tonnes or 20% were sourced from gold swaps from commercial banks.
If the BIS was adopting the level of disclosures made by publicly held companies, such as commercial banks, some explanation of these changes probably would have been required by the accounting regulators. This irony may not be lost on those dealing with regulatory activities at the BIS. Presumably the shrinkage of the BIS' gold banking business shows that even central banks now prefer to hold their own gold or hold it in earmarked form -- that is, as allocated gold.
A review of Table B below highlights recent BIS activity with gold swaps, and despite the recent declines, the recent positions estimated from the BIS monthly statements remained earlier this year and the volume of trading has been significant.
No explanation for this continuing use of swaps has been published by the BIS. Indeed, no comment on the bank's use of gold swaps has been offered since 2010.
This gold is supplied by bullion banks via the swaps to the BIS. The gold is then deposited in BIS gold sight accounts (unallocated gold accounts) at major central banks such as the Federal Reserve.
The reasons for this activity have never been fully explained by the BIS and various conjectures have been made as to why the BIS is facilitating it. One conjecture is that the swaps are a mechanism for the return to central banks of the gold they have secretly supplied to cover shortages in the gold markets.
The use of the BIS to facilitate this trade would suggest a desire to conceal the rationale for the transactions.
As can be seen in Table A below, the BIS has used gold swaps extensively since its financial year 2009-10. No use of swaps is reported in the bank's annual reports for at least 10 years prior to the year ended March 2010.
The February 2021 estimate of the bank's gold swaps (552 tonnes) is higher than any level of swaps reported by the BIS at its March year-end since March 2010. The swaps reported at March 2021 are at the highest year-end level reported.
Table A ... Swaps reported in BIS annual reports
March 2010: 346 tonnes.
March 2011: 409 tonnes.
March 2012: 355 tonnes.
March 2013: 404 tonnes.
March 2014: 236 tonnes.
March 2015: 47 tonnes.
March 2016: 0 tonnes.
March 2017: 438 tonnes.
March 2018: 361 tonnes.
March 2019: 175 tonnes.
March 2020: 326 tonnes.
March 2021: 490 tonnes.
March 2022: 358 tonnes.
The table below reports the estimated monthly swap levels since August 2018. It can be seen that the BIS is actively involved in trading gold swaps and other gold derivatives with changes from month to month reported in excess of 100 tonnes in this period.
Table B ... Swaps estimated by GATA from BIS monthly statements of account
Month ….. Swaps
& year … in tonnes
Jul-22 .... /56
Jun-22 .... /202
Apr-22 ..... /315
Mar-22 .... /358
Feb-22 .... /472
Jan-22 ..... /501
Sep-21 .... /438
Aug-21 .... /464
Jul-21 .... /502
Apr-21 .... /472
Jan-21 .... /523
Dec-20 .... /545
Nov-20 .... /520
Oct-20 .... /519
Jul-20 ..... / 474
Jun-20 .... / 391
May-20 .... / 412
Apr-20 .... / 328
Mar-20 .... / 326*
Feb-20 .... / 326
Jan-20 .... / 320
Dec-19 .... / 313
Nov-19 .... / 250
Oct-19 .... / 186
Sep-19 .... / 128
Aug-19 .... / 162
Jul-19 ..... / 95
Jun-19 .... / 126
May-19 .... / 78
Apr-19 ..... / 88
Mar-19 .... / 175
Feb-19 .... / 303
Jan-19 .... / 247
Dec-18 .... / 275
Nov-18 .... / 308
Oct-18 .... / 372
Sep-18 .... / 238
Aug-18 .... / 370
± The estimate originally reported by GATA was 487 tonnes, but the BIS annual report states 490 tonnes, It is believed that slightly different gold prices account for the difference.
* The estimate originally reported by GATA was 332 tonnes, but the BIS annual report states 326 tonnes. It is believed that slightly different gold prices account for the difference.
GATA uses gold prices quoted by USAGold.com to estimate the level of gold swaps held by the BIS at month-ends.
As noted already, the BIS in recent times has refused to explain its activities in the gold market, nor for whom the bank is acting:
Despite this reticence the BIS is almost certainly acting on behalf of central banks in taking out these swaps, as they are the BIS' owners and control its Board of Directors.
This refusal to explain prompts some observers to believe that the BIS acts as an agent for central banks intervening surreptitiously in the gold and currency markets, providing those central banks with access to gold as well as protection from exposure of their interventions.
A recent report published by Bullion Star's Ronan Manly on the Bank of Portugal's use of its gold reserves reinforces this point as the Bank of Portugal confirms that 20 tonnes of its gold is stored with the BIS:
This disclosure seems a little economic with the truth as the BIS has no gold storage facilities of its own. Gold held by the BIS on behalf of central banks is either deposited into a BIS gold sight (unallocated) account or a BIS earmarked (allocated) gold account and deposited normally with one of the central banks based at a major gold trading center, such as the Federal Reserve in New York.
Since Manly shows that the Bank of Portugal is focused on earning income from its gold, it seems likely that this gold is held in a BIS sight account, though its ultimate location is unclear.
Some commentators have suggested that a portion of the gold held by exchange-traded funds and managed by bullion banks may be sourced directly from central banks.
Robert Lambourne is a retired business executive in the United Kingdom who consults with GATA about the involvement of the Bank for International Settlements in the gold market.
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