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Adrian Douglas: What's unravelling is gold price suppression

Section: Daily Dispatches

By Adrian Douglas
Friday, July 30, 2010

Yesterday the Financial Times published an article headlined "BIS Gold Swaps Mystery Is Unravelled" in an attempt to clarify the recently discovered gold swaps undertaken by the Bank for International Settlements with European commercial banks:

I recently published my interpretation of these gold swaps and concluded that they were most likely a secret bailout of one or more bullion banks that do not have enough physical gold to meet burgeoning demand:

Lawyers always tell their clients to shut up and not speak to the press because the more they say without proper legal consultation, the more likely they are to incriminate themselves. One has to wonder why lawyers at the BIS didn't offer similar advice to the spokespeople at the BIS, because they have opened their mouths and inserted both feet.

The FT reports that "Jaime Caruana, head of the BIS, told the FT the swaps were 'regular commercial activities' for the bank."

... Dispatch continues below ...


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The FT also reports that "'the client approached us with the idea of buying some gold with the option to sell it back,' said one European banker, referring to the BIS."

So we are led to believe that the BIS just casually called up some commercial banks and proposed a "regular commercial" activity of a 346-tonne gold swap.

The only problem with this story is that this is the biggest gold swap in history. It was anything but a "regular commercial activity."

The FT tries to palm off the biggest gold swap in history as just a matter of the BIS earning a little return on $14 billion.

The FT says it has learned that the swaps, which were initiated by the BIS, came as the so-called "central banks' bank" sought to obtain a return on its huge U.S. dollar-denominated holdings. The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits the banks were taking from the Basel-based institution.

And GATA has learned that the moon is made of Swiss cheese.

In central banking $14 billion is chump change. The U.S. Treasury auctions between $70 billion and $130 billion of Treasury debt very other week. Only a few weeks ago the European Central Bank created a trillion dollars out of thin air to defend the euro amid the Greek debt crisis.

There are two sides to a swap transaction, but one would have to have the IQ of a grapefruit to believe that the important part of this transaction is a piffling $14 billion and not the 346 tonnes of gold that make it the biggest gold swap in history.

But the BIS has given us another piece of information.

The FT says: "Three big banks -- HSBC, Societe Generale, and BNP Paribas -- were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads."

I had assumed in my last article that only one bullion bank was involved, but we now find that more than 10 banks were involved. The first on the list is none other than HSBC, which along with JPMorganChase holds 95 percent of all gold and precious metals derivative positions among U.S. commercial banks as reported to the U.S. Treasury Department. HSBC and JPMorganChase are also holding a massive short position in gold and silver on the New York Commodity Exchange. Further, HSBC is the custodian of the gold that is supposedly backing the exchange-traded fund GLD.

In my analysis of the BIS swaps I postulated that a bullion bank had made a swap with one or more central banks and had obtained bullion in exchange for $14 billion. I further postulated that the bullion bank made another swap with the BIS whereupon the BIS gave the bank $14 billion but the bullion bank did not hand over the gold to the BIS but instead credited the BIS with a ledger entry of gold in the BIS unallocated gold account. This would allow the bullion bank to have real gold to meet burgeoning demand while the accounts would show that the same gold had been credited to the BIS.

The FT says: "Officials said other commercial banks obtained the gold from the lending market, borrowing bullion from emerging countries' central banks."

So the tripartite nature of this shady transaction is confirmed -- central banks were a source for the real gold. But the real gold wasn't the "gold" that the BIS received as a swap for $14 billion. The FT explains:

"The gold used in the swaps came mainly from investors' deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called 'allocated accounts,' which restrict the custodian banks' ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper 'unallocated accounts,' which give banks access to their bullion for their day-to-day operations."

But unallocated gold is not gold at all. It is not gold that has been deposited that is loaned to someone else. It is gold that has been deposited that is loaned simultaneously to many other people. I have estimated that for each ounce in their vaults the bullion banks have loaned or sold 45 ounces.

So the FT's story appears to confirm my thesis that the BIS has been credited with 346 tonnes of ledger-entry gold in the BIS unallocated gold accounts held with the bullion banks. This makes the BIS an "unsecured creditor" of the bullion banks as defined by the London Bullion Market Association's description of "unallocated account" holders.

The FT story suggests that at least 10 bullion banks needed physical gold bullion desperately. This looks like a rerun of the 1960s London Gold Pool fiasco where central banks dishoarded gold to meet massive investor demand in a futile attempt to maintain a gold price of $35 per ounce.

I have spelled out in recent articles that there is a run on the bullion banks has begun and is gaining momentum. Investors and institutions are realizing that "unallocated gold" is not gold at all but just an unsecured promise for gold. So investors and institutions are starting to demand delivery of their metal, and as there is only 1 ounce backing each 45 ounces that are claimed, the situation is turning into what will be a short squeeze of epic proportions.

The FT says: "Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee."

As Jeffrey Christian of CPM Group has explained, the "physical" gold market is in fact a misnomer as that market is actually a paper market backed by only a small amount of physical gold:

So investors have bought a record amount of "physical gold," which is actually paper gold that they have never seen, and only about 2.3 percent of what has been sold actually exists. The bullion banks are "awash" with liabilities for the record amount of gold they are supposed to be holding. Investors are now distrusting the bullion banks and are asking for delivery, so is it surprising that the record amount of "physical gold" sales has led to a record gold swap being transacted to give the bullion banks liquidity?

The International Monetary Fund has been surreptitiously selling gold at a clip of around 15 tonnes per month since February without any official announcements and without disclosing the recipients. This is another sign that the bullion banks are in serious trouble.

When 45 ounces of gold are sold but only 1 ounce is sourced, the result is a massive suppression of the gold price. But the converse is also true: When 45 ounces of gold are demanded for every 1 ounce that is in the vault, the price explosion is beyond imagination.

What is unravelling is not the mystery of the BIS gold swaps, as claimed by the Financial Times, but the unravelling of the gold price suppression scheme itself.


Adrian Douglas is a member of GATA's Board of Directors and editor of the Market Force Analysis letter (, which provides indications of market turning points and good times to enter, take profits, or exit a market. Subscribers receive bi-weekly bulletins on the markets of their choice.

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