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Robert Lambourne: BIS gold swaps rose again in August
By Robert Lambourne
September 6, 2024
The August statement of account for the Bank for International Settlements has just been published:
https://www.bis.org/banking/balsheet/statofacc240831.pdf
From this it is possible to estimate the volume of gold swaps undertaken by the BIS at the month end: 157 tonnes at August 31. This is the highest level since May 31, 2023, and compares to an estimate of 116 tonnes for June 30 and an estimate of 148 tonnes at July 31, so swaps have increased during June and July by 41 tonnes.
Since February 29 the volume of swaps has increased by 89 tonnes.
Table 1 below sets out the historical level of monthly gold swaps estimated since August 2018. As is evident from the table there is still a considerable level of gold being traded via these swaps. While gold swaps are down significantly from the 501 tonnes estimated in January 2022, the level seemingly remains quite volatile, suggesting the use of swaps to cover shorter-term trading requirements.
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To repeat the regular point made in these GATA reports, it seems that these swaps are undertaken by the BIS for one or more of its central bank customers with the swapped gold being accounted for as being held in a BIS registered sight account at a central bank. Given what is happening in the gold market more generally, it appears reasonable to assume that the Federal Reserve is the BIS' customer for the swaps transactions. The evidence strongly suggests that the source of this gold is bullion banks and the gold comes from gold registered as being held by gold exchange-traded funds.
The recently published 2023-24 annual report for the BIS --
https://www.bis.org/about/areport/areport2024.pdf
-- confirms GATA's estimate of the bank's gold swaps as of March 31 in Table 1 of 72 tonnes.
The BIS annual report contains information that also confirms certain assumptions used to estimate the swap volumes. This includes confirmation that the BIS continued to hold 102 tonnes of its own gold. The annual report also provides strong support, via its reporting on transactions with related parties, that the source of the swapped gold is bullion banks rather than central banks.
However, the BIS continues to offer no explanation for why it is undertaking gold swaps. The BIS first reported gold swaps in its annual report for 2009-10, so gold swaps have been provided by the BIS for its customer central banks for more than 15 years. See Table 2 below for the year-end level of gold swaps reported by the BIS in its annual reports since March 2010.
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Table 1 — Gold swaps estimated by GATA from BIS monthly statements of account
Month ….. Swaps
& year … in tonnes
Aug-24 .... /157
Jul-24 .... /148
Jun-24 .... /116
May-24 .... /109
Apr-24 .... /78
Mar-24 .... /72
Feb-24 .... /68
Jan-24 .... /117
Dec-23 .... /121
Nov-23 ..../100
Oct-23 ..../68
Sep-23 ..../96
Aug-23 ..../129
Jul-23 .... /103
Jun-23.... /87
May-23 .... /188
Apr-23 .... /135
Mar-23 .... /77*
Feb-23 ... /136
Jan-23 ... /103
Dec-22 ... /0
Nov-22 ... /105
Oct-22 ..... /7
Sep-22 ...../57
Aug -22 ..... /75
Jul-22 ..... /56
Jun-22 ..... /202
May-22 ..... /270
Apr-22 ..... /315
Mar-22 .... /358
Feb-22 .... /472
Jan-22 ..... /501
Dec-21.... /414
Nov-21.... /451
Oct-21.... /414
Sep-21 .... /438
Aug-21 .... /464
Jul-21 .... /502
Jun-21 ..../471
May-21 ..../517
Apr-21 .... /472
Mar-21.... /490+
Feb-21 ...../552
Jan-21 .... /523
Dec-20 .... /545
Nov-20 .... /520
Oct-20 .... /519
Sep-20...../ 520
Aug-20...../ 484
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 78 tonnes, but the BIS annual report states 77 tonnes. It is believed that slightly different gold prices account for the difference.
+ 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.
*
There seem to be no new reasons to alter the assumption that the BIS is continuing to enter these swaps on behalf of the Federal Reserve. There is no evidence to suggest that any other major central bank is actively trading this much gold, and some central banks are still accumulating physical gold.
As noted above, the basic transaction that the BIS is believed to undertake is to swap dollars for gold that is transferred from a bullion bank, then to deposit this gold in a gold sight account at a central bank, presumed to be the Fed but almost certainly being the central bank that is using the BIS to execute the gold swap on its behalf.
Given the recent volatility in BIS gold swaps, it seems likely that most are of a short duration. Why a central bank needs the BIS to undertake gold swaps isn't clear. The swaps are likely connected with short-term trading needs and perhaps are being used to aid suppression of the gold price via the futures markets.
The volatility in the volume of swaps is clear from a review of Table 1 above. Volumes of swaps in 2023 and so far in 2024 remain well below the average seen in the preceding four years but remain significant. The gold price increased from $2,327 at June 28 to $2,447 at July 31 (per USAGold.com). Using the July 31 gold price, the 148 tonnes of gold swaps carried out via the BIS in July are valued at about $11.6 billion. (The corresponding value of the swaps in place as of June 28 was around $8.7 billion.)
So the recent trading in BIS gold swaps has high dollar value and shows that gold remains a significant monetary asset still actively traded on behalf of at least one central bank, presumably the Fed.
As ever with the BIS, it remains unlikely that more information about why it undertakes these transactions will be provided. No such information was provided in the recently published annual report, which covered the year ending March 31, 2024.
GATA’s research on gold price suppression indicates that an active policy of price suppression was implemented around 30 years ago and was primarily intended to suppress interest rates. Recent updates on this research are provided by the presentations GATA secretary/treasurer Chris Powell and Chairman Bill Murphy made in November 2023 at the New Orleans Investment Conference:
https://www.gata.org/node/22886
https://www.gata.org/node/22889
In a more recent dispatch Powell laments that so much of the bullish commentary on gold fails to highlight the regular and repeated efforts to suppress the gold price during the past 30 years. He argues that this bullish commentary provides an incomplete view of the risks as well as the rewards of gold ownership even as the financial outlook for the U.S. government seems fraught amid so much debt:
https://www.gata.org/node/22993
This influential report from 2005 abut "Gibson's Paradox" remains relevant and highlights work in this area by former U.S. Treasury Secretary and Harvard University President Lawrence Summers:
https://goldensextant.com/gibsonsparadox/
It also remains relevant to highlight the following remarks made in a speech by Summers on September 8, 1999, as reported in the book "The Wealth of Progressive Nations: The Collected Lectures of Lawrence Summers." The remarks below are an extract of a section of the speech titled "A New Economic Paradigm."
"Most important of all, the Clinton-Gore administration has established a new paradigm for the management of our nation's budget, with enormous cumulative benefits for our economy and our citizens. It has become a commonplace to remark on how exceptional today's 4.2% unemployment rate is relative to any expectation at the beginning of the decade. It is no less remarkable that today, after 8.5 years of expansion, long-term interest rates are around 2 percentage points lower than they were at its start."
From this it is reasonable to conclude that keeping interest rates "lower" was considered a priority by the Clinton-Gore administration and succeeding at it was thought to be "remarkable." While this is not proof that gold price suppression was undertaken specifically to reduce interest rates, it shows that reducing interest rates was a priority for the U.S. government.
Further evidence of this priority is provided by an interview with former Treasury Secretary Robert Rubin about his time working in the Clinton administration after January 1993. In answer to a question on the initial decision to prioritize deficit reduction, Rubin remarks: "On the other hand, if interest rates go down as a result, then that will stimulate growth, and we thought that the beneficial effect of lower interest rates would outweigh the contractionary impact of the deficit reduction":
https://www.pbs.org/wgbh/pages/frontline/shows/clinton/interviews/rubin.html
Hence there is plenty of evidence that keeping interest rates low was a major goal of the Clinton presidency.
In the context of gold price suppression being used to reinforce efforts to reduce interest rates, the following report issued by GATA in 2007 with an analysis of the gold market by Frank Veneroso is a notable reference as it confirms that GATA's primary assertions about gold price suppression were plausible:
https://www.gata.org/node/5275
... More recent trends in U.S. government deficits ...
The remarks of Rubin and Summers on the U.S. government's priorities in the 1990s are reminders of how far the the financial positions of Western nations have worsened since then.
The worsening trend for Western nations, especially the United States, probably reduces the appeal to the BIS of undertaking gold swaps on behalf of any central bank where a liability to return swapped gold is incurred. The trend possibly also reduces the appeal of any such swaps to the central bank or banks for which the BIS has been acting.
A report issued by GATA in 2012 is worth revisiting as it highlights the acknowledgment of gold price suppression by a former chairman of the BIS, Jelle Zijlstra, a Dutch politician, economist, and central banker. So it seems likely that BIS management understands what the swaps are being used for and why no reasons for the transactions are given.
https://www.gata.org/node/11304
The conundrum facing the Federal Reserve about dollar interest rates has seemingly been resolved for now with the Fed apparently not being ready to reduce rates close to the upcoming presidential election. Further market turmoil driven possibly by Japanese interest rates and currency levels may change this assumption rapidly given the high level of government debt in both countries.
Despite its opaque rhetoric, the Fed needs to sustain confidence in the U.S. stock market and the Treasuries market when the government’s ever-increasing debt has become so controversial. Forthcoming new debt issuance is being monitored even more closely by investors.
The Treasury Department’s monthly report on June 2024 revenue and expenditure shows a cumulative deficit of $1.3 trillion and points toward a broadly similar level of cash outflows in the current fiscal year to the underlying deficit of about $2.1 trillion in the year prior to September 30, 2023. The higher interest charge being reported virtually each month is one reason for the deficit to increase.
The run rate of gross interest costs reported in the last 12 months has now passed $1 trillion, despite a more muted level of annual interest payments on the approximately $7.2 trillion of Treasury debt held by federal government-sponsored trust funds. This more muted increase is perhaps indicative of the pressure to keep a lid on interest costs.
In these circumstances the room for the Fed to raise interest rates in the next few years seems restricted and hence it seems likely as noted above that the BIS and some of its member central banks might be questioning the role of the BIS in these swaps and the obligation to make future deliveries of gold, since the Fed may be unable to move interest rates high enough to contain inflation.
In this context the relatively stable price of oil is relevant as it seems that strong forces want to keep oil prices subdued despite developments that might be expected to result in higher prices, such as production cuts by major producers and the dangers to shipments through the Red Sea.
With 2024 being a presidential election year in the United States there appear to be strong political incentives to contain oil prices and that even recent moves to consolidate the number of oil producers in the U.S. might have been tacitly encouraged in return for commitments to keep production high.
The success or failure of such efforts might be a clue to the timing of a gold price reset, as there appears to be little effort by the Fed and Treasury Department to acknowledge that federal debt levels have become dangerously high.
The report at the following link, which reviews the possible connection between hedge funds' basis trades in U.S. Treasuries and the Fed’s program of quantitative tightening, could be read as another sign of how difficult it is to locate purchasers of U.S. Treasuries at current prices:
https://www.gata.org/node/22873
The link below contains a commentary on the apparent enrichment of certain hedge funds and the individuals involved as a result of the apparent support from the Fed to the hedge fund basis trade used to effect "quantitative tightening":
https://www.gata.org/node/22972
It also seems that the incentives for foreigners to own U.S. Treasuries are diminishing as efforts to confiscate Russian assets appear to be moving forward. Saudi Arabia has apparently warned that any such confiscation may cause it to sell its holding of U.S.Treasuries.
Again, it seems appropriate to note that a report titled "Living with High Public Debt" authored by Serkan Arslanalp and Barry Eichengreen was published in August 2023 by the Federal Reserve Bank of Kansas City. This report reinforces just how difficult it is to handle high federal government debt with spending far in excess of revenue.
The report can be found at the Kansas City Fed's internet site and at GATA's:
https://www.kansascityfed.org/Jackson%20Hole/documents/9749/Living_With_High_Public_SA_Sep_2_2023.pdf
https://www.gata.org/sites/default/files/Living_With_High_Public_Debt_Sep_2_2023.pdf
Here is an excerpt from the conclusions:
"Looking forward, the challenges are daunting. Given aging populations, governments will have to find additional finance for healthcare and pensions. They will have to finance spending on defense, climate change abatement, and adaptation, and the digital transition. A growing number of low-income countries are already in debt distress.
"Living with high public debt therefore means avoiding steps that make a bad situation worse. This means minimizing unproductive public spending. It means targeting social transfers as a way of limiting pressures on the expenditure side. It means limiting contingent liabilities by, inter alia, adequately regulating banks and avoiding recapitalization costs.
"It means contemplating tax increases where revenues are low by international standards. It means further developing financial markets where markets are underdeveloped and where a diverse population of local investors in debt securities is absent. It means embracing legal and procedural changes that streamline and speed restructuring for countries whose debts are unsustainable.
"This modest medicine does not make for a happy diagnosis. But it makes for a realistic one."
In the circumstances vividly described in the report it seems unsurprising that the price of gold has increased so far in 2024. The report offers yet more reason to question whether gold swaps undertaken via the BIS, probably on behalf of the Fed, are being used to suppress the dollar gold price.
... 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 on 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:
http://www.bis.org/publ/arpdf/archive/ar1931_en.pdf
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:
https://www.gata.org/node/11012
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 may be 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 disclosure 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 2 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.
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Table 2
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
March 2023: 77 tonnes
March 2024: 72 tonnes
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Robert Lambourne is a retired business executive in the United Kingdom who consults for GATA about the involvement of the Bank for International Settlements in the gold market and U.S. government debt.
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