BIS gold swaps reach another record high

No explanation for the continuing high level of swaps has been published by the BIS. Indeed, the bank has offered…

By Robert Lambourne via GATA

By Robert Lambourne
Thursday, January 21, 2021

The recently reported December statement of account of the Bank for International Settlements —

— discloses that the bank’s use of gold swaps has increased by an estimated 25 tonnes to about 545 tonnes, a record level.

The increase in BIS swaps corresponded with an increase of more than $100 in the gold price, which rose to $1,898.60 at December 31

As Table B below shows, the BIS undertakes large amounts of gold swaps on a regular basis.
The current volume of BIS gold swaps remains larger than the 504.8 tonnes of gold held by the European Central Bank and about 67 tonnes less than the reported gold reserves of the 10th largest national gold holding, the 612.4 tonnes held by the Netherlands.

No explanation for the continuing high level of swaps has been published by the BIS. Indeed, the bank has offered no comment on its use of gold swaps since 2010. (See below.)

The gold involved in the swaps is supplied to the BIS by bullion banks. The gold is then deposited in BIS gold sight accounts at major central banks, like the Federal Reserve.

The BIS’ use of gold swaps and gold derivatives has been extensive in the last year, with the level reported in recent months being the highest in the period since August 2018, as highlighted in Table B below.

By contrast, in May 2019 the bank was exposed to only 78 tonnes in swaps.

The December 2020 estimate of the bank’s gold swaps (545 tonnes) is also higher than any level of swaps reported by the BIS at its March year-end since 2010. Based on a review of the bank’s annual reports, it seems that the BIS was not involved in gold swaps for at least 10 years prior to 2010.

As can be seen in Table A, the BIS has used gold swaps extensively since its financial year 2009-10.

Table A

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

The BIS rarely comments publicly on its banking 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 all carried out with commercial banks and so did not involve other central banks.

Hence it is reasonably likely that the current level of gold swaps is the highest use of them by the BIS for at least 20 years.

The swap 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 swap counterparties). This mismatch has not yet been reported as such in the bank’s annual reports.

The table below reports the estimated swap levels since August 2018. It can readily 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 of as much as 100 tonnes.

Table B
Month ….. Swaps
& year …. in tonnes
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 332 tonnes, but the BIS Annual Report states 326 tonnes. It is believed that this difference arose because the gold price used to calculate the GATA estimate was lower than the price used by the BIS. GATA uses gold prices quoted by 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 the reasons for its activities in the gold market, nor for whom the bank is acting:

But the BIS is almost certainly acting for central banks, as they are the bank’s 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 these interventions.

One possibility is that the swaps provide a mechanism for bullion banks to return gold originally lent to them by central banks to cover possible shortfalls of gold. Some commentators on the gold market 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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