These transactions create a mismatch at the BIS, and so far this mismatch has not been reported in BIS annual reports…
By Robert Lambourne
Thursday, June 11, 2020
Gold market activity by the Bank for International Settlements appears to have risen in May to its highest level in more than three years, according to the bank’s statement of account for the month:
The data in the May statement indicates that the BIS increased its position in gold swaps and gold-related derivatives by 84 tonnes, bringing the total to 412 tonnes. For context, Turkey is reported to have the 14th largest gold reserves with about 412 tonnes. Hence the May swaps by the BIS represent a significant chunk of gold.
The increase in the BIS’ use of gold swaps and derivatives is especially dramatic over the last 12 months, since last May the total stood at only 78 tonnes. One has to return to March 2017 to find a higher level of gold swaps reported by the BIS — 438 tonnes.
The BIS uses gold swaps and other gold derivatives to gain access to gold held by commercial banks. Then the BIS deposits this gold in gold sight accounts held on behalf of the BIS at major central banks, like the U.S. Federal Reserve.
These transactions create a mismatch at the BIS, which ends up being long unallocated gold (the gold held in BIS sight accounts at major central banks) and short allocated gold (gold required to be returned to its swap counterparty). So far this mismatch has not been reported in BIS annual reports.
Recently the BIS published a study titled “Central Bank Swaps Then and Now: Swaps and Dollar Liquidity in the 1960s” by Robert N McCauley and Catherine R Schenk:
The introduction to the paper states the following with the use of boldfaced italics for emphasis:
“We profile the Federal Reserve’s swap lines since 1962. We consult not only Fed sources, but also Bank of England, Swiss National Bank and Bank for International Settlements archives. We provide the first systematic analysis of the Fed’s eurodollar operations in the 1960s through swap lines. The BIS served the Fed as an operating arm, taking credit risk as it placed eurodollar deposits to stabilise offshore dollar yields in advance of year- or quarter-end window-dressing. While short-lived, these operations have a very modern ring.”
While the scope and content of this study are not directly relevant to the use of gold swaps by the BIS, the study does highlight the close relationship between the Federal Reserve and the BIS. It emphasizes that the BIS long has acted on behalf of the Federal Reserve, has done so via swaps, and crucially has been prepared to take on credit risk for the Fed.
This invites conjecture that the use of gold swaps by the BIS is driven by the Federal Reserve.
The study provides no proof that this is the case, but that the BIS has never provided any comment on its exposure caused by being long unallocated gold and short allocated gold may well be explained by the Fed’s being the most powerful central bank and the sole recipient of the unallocated gold placed in sight accounts by the BIS.
The BIS auditors who must satisfy themselves that the BIS can cover the mismatch between allocated and unallocated gold even in extreme market conditions would presumably see the Fed as being capable of supplying as much gold as the BIS would require once the gold swaps terminated.
The BIS’ monthly reports do not provide enough information to to calculate the exact amount of swaps, but, as noted above, based on the information in its statement for May the bank’s month-end gold swaps are estimated to be about 412 tonnes.
The table below reports the estimated swap levels since August 2018, and it can be seen that the May 2020 swaps are the highest in this time frame. It can also be seen that the BIS is actively involved in trading gold swaps and other gold derivatives, with changes from month to month in this period rising above 100 tonnes.
Month ….. Swaps
& year …. (tonnes)
May-20…. / 412
Apr-20…. / 328
Mar-20…. / 332
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
More background on the bank’s medium-term history of using gold swaps is available here:
On February 3, 2019, GATA published comments from a former gold industry executive describing the activities of the BIS in gold swaps in earlier decades:
The former executive wrote: “Effectively this process created a supply of ‘paper gold’ — sometimes but not always marked to market — that had a depressing effect on the gold price.”
The BIS refuses to explain its activity in the gold market — its objectives and underlying parties in interest:
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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