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Robert Lambourne: BIS gold swaps held steady through April and are probably intervention by Fed
By Robert Lambourne
Sunday, June 4, 2023
From the information contained in the recently published March 31 and April 30 statements of account of the Bank for International Settlements --
-- the bank’s gold swaps can be estimated at 78 tonnes as of March 31 and 135 tonnes at April 30. These compare to the 136 tonnes estimated as of February 28.
Evidence of the significant trading carried out via BIS gold swaps is provided by the changes since October 2022 in the volumes of swaps each month. On October 31, 2022, there were an estimated 7 tonnes of swaps outstanding, which increased to 105 tonnes at November 30 and then fell back to none at December 31.
So far in 2023 these significant changes have continued, with 103 tonnes of gold swaps estimated as of January 31, followed by the 136 tonnes as of February 28, 78 tonnes as of March 31, and 135 tonnes as of April 30.
Once again it seems reasonable to suspect that the BIS has entered these swaps on behalf of the U.S. Federal Reserve.
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The basic transaction that the BIS undertakes is to swap dollars for gold from a bullion bank and then deposit the gold in a gold sight account at a central bank, almost certainly being the central bank that is using the BIS to execute the gold swap on its behalf.
Given the volatility in recent months in the level of gold swaps reported by the BIS, it seems likely that the swaps are mainly of a short duration. Why a central bank needs the BIS to undertake these gold swaps isn't clear, but the swaps seem likely to be tied to short-term trading needs. This could include actions to suppress the gold price.
Using the April 30 gold price of $1,990 (per USAGold.com), the 136 tonnes of BIS gold swaps are valued at about $9 billion. Hence it is evident that the recent volatility in BIS gold swaps is significant and shows that gold remains a significant monetary asset.
As ever with the BIS, it remains unlikely that more information about the reasons for the bank to undertake these transactions, presumably on behalf of a central bank client, will ever be provided. This secrecy implies that central bank gold policy involves much deception of the public and the markets -- that it is currency market intervention for which the BIS provides camouflage.
The worsening finances of Western nations, especially the United States, may reduce the appeal of gold swaps to the BIS and the central bank or banks for which the BIS has been acting.
The recent strength of the gold price together with the conundrum facing the Federal Reserve about raising dollar interest rates must reduce the appeal of having to return swapped gold to bullion banks. Despite its rhetoric about pushing interest rates higher, the Fed needs to avoid more erosion of confidence in the U.S. Treasuries market when the U.S. government’s rising debt recently has been so controversial. The U.S. Treasury Department's April report demonstrates the continuing trend of higher interest costs:
Because of the special measures taken to avoid breaching the former debt ceiling, it seems likely that the portion of the underlying interest cost payable to government-sponsored trust funds has been underreported recently, but this will presumably be corrected in June and then a fuller picture of the growing interest cost will be clear. The cumulative interest charge on the externally held debt is up by 42% compared to the same period in 2022 and indicates the problem that higher interest costs cause for U.S. government borrowing.
In these circumstances the room for the Fed to raise interest rates much more seems restricted and hence it seems that the BIS and some of its shareholders might be questioning the role of the bank in these swaps and the obligation to make future deliveries of gold, since the Fed seems unlikely to move interest rates high enough to contain inflation.
Indeed, a cynic might claim that the recent deal on the federal government debt makes it easier to defend a banking crisis by allowing the U.S. government to offer further bank deposit guarantees. The debt ceiling deal may even make a revaluation of gold easier for the United States to carry out.
As is clear from Table B below, the level of BIS swaps had been significantly higher in the first half of last year, and the October and December totals were easily the lowest in more than four years.
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Table A below highlights the level of gold swaps reported in the annual reports of the BIS 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 zero.
(The BIS' half-year report to September 30, 2022, discloses that the BIS still holds 102 tonnes of its own gold and that very little of its activities in derivatives are with central banks. An assumption that the gold held by the BIS remains at 102 tonnes has been used to make the estimate of the gold swap level for December. The low level of derivatives reported by the BIS using central banks as counterparties, disclosed in the last interim report, is a reason to assume that the swaps are almost certainly done with gold bullion banks rather than central banks. Historically, the first swaps described below were done with bullion banks.)
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... 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 created a mismatch at the BIS, which may have ended 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 the name of the BIS in gold sight accounts at major central banks, 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 have regularly been 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 has facilitated it. One conjecture is that the swaps are a mechanism for the return of gold secretly supplied by central banks to cover shortfalls in the gold markets. The use of the BIS to facilitate this trade suggests of 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 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
Feb-23 ... /136
Dec-22 ... /0
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 has almost certainly acted on behalf of central banks in taking out these swaps, as they are the BIS’ owners and control its Board of Directors. Historically, the BIS has often acted on behalf of the Federal Reserve.
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.
As mentioned above, 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.
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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