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Robert Lambourne: BIS gold swaps reverse sharply upward as metal's price rises
By Robert Lambourne
Wednesday, December 7, 2022
On November 10 my most recent commentary on the gold swaps of the Bank for International Settlements noted that "after 12 years in the gold swap business, the BIS seems to have just about gotten out":
It goes to show how wrong you can be, since the bank's November statement of account, just published --
— can be used to estimate that the bank's gold swaps, which had declined to an estimated 7 tonnes as of October 31, have risen sharply to an estimated 105 tonnes as of November 30. This is the BIS' highest level of estimated swaps since June 30 this year.
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Perhaps the BIS is taking instructions from manic-depressive gold price suppressors, and, if so, it would be reminiscent of an old nursery rhyme, slightly altered here:
Oh, the grand old BIS.
It had ten thousand swaps.
It marked them up to the top of the market
And it marked them down again.
And when they were up, they were up,
And when they were down, they were down,
And when they were only halfway up,
They were neither up nor down.
On a more serious note, it is clear from Table B below that the level of BIS swaps had been significantly higher in the first half of the year and the October total was easily the lowest in more than four years. Even the much-increased level of swaps estimated for November is still far below the average level seen in the first half of 2022.
Perhaps the key point to re-emphasize is that the BIS has been an active trader of significant volumes of gold swaps on a regular basis for at least 12 years, and the recent data indicates that this strong volume of trading is continuing, with 98 tonnes of swapped gold taken from commercial banks in November and deposited in gold sight accounts at central banks that work closely with the BIS.
Maybe this increase was simply an emergency act by the BIS to procure swapped gold, since November saw a strong increase in the gold price to $1,773 at November 30 from $1,633 at October 31.
The BIS half-year report at September 30, 2022, also has been published recently, and while it offers no direct comment on the use of gold swaps, its disclosures include confirmation of three things: first, that the BIS still holds 102 tonnes of its own gold; second, that very little of its activities in derivatives (presumably including gold swaps) are with major central banks and hence are almost certainly with commercial bullion banks; and third, the gold in the BIS' sight accounts is predominantly held by major central banks that are considered to be related parties.
Table A below highlights the level of gold swaps reported in the annual reports of the BIS all the way back to 2010, when the bank's use of gold swaps appears to have begun. At only one year-end since then, in March 2016, has the swap level been lower than it is was in October 2022.
So it still seems possible that the assertions made by some commentators, for example --
-- about "gold leases and swaps" levels at the BIS falling because of the application of "Basel III" regulations about unallocated gold are correct and remain relevant.
The estimates made here do not include leases, so I can offer no comment on them, but it is still clear that the dominant recent trend at the BIS is a reduction in gold swaps, where the BIS takes swapped gold from bullion banks and deposits it in sight accounts with major central banks. The next few months will reveal more about the direction of the BIS' gold swaps.
It remains highly unlikely that more information about the swaps will be released by the BIS, because, to date, apart from the bank's disclosures in accounting notes, there has been no direct comment issued on gold swaps in the bank's financial reports since the reference made 12 years ago and highlighted below.
... 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 have created 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 bank's establishment 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 potential 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, although the recent declines suggest this is changing.
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 large especially in early 2022 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 central banks to recover gold secretly supplied by them to cover shortfalls in the gold markets. The use of the BIS to facilitate this trade suggests 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) was higher than any level of swaps reported by the BIS at its March year-end since March 2010. The swaps reported at March 2021 were at the highest year-end level reported, as is clear from Table A.
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 swap levels since August 2018. It can be seen that the BIS is actively 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
Nov-22 .... /105
Oct-22 ..... /7
Aug -22 ..... /75
Jul-22 ..... /56
Jun-22 ..... /202
May-22 ..... /270
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. It is possible that the swaps provide a mechanism for bullion banks to return gold originally lent to them by central banks to cover bullion bank shortfalls of gold. Some commentators have suggested that a portion of the gold held by exchange-traded funds and managed by bullion banks is sourced directly from central banks. However, it seems unlikely that a confirmation or denial will ever be issued by the BIS.
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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