The BIS long has acted on behalf of the Federal Reserve and has done so via swaps and crucially has been prepared to take on credit risk. This invites…
By Robert Lambourne
Tuesday, June 2, 2020
According to its recently published March and April statements of account —
— the Bank for International Settlements, which acts as an agent for most central banks, appears to have made little change in its use of gold swaps. The BIS is estimated to have increased its position in gold swaps and gold-related derivatives by 6 tonnes in March to 332 tonnes, and then to have decreased it by 4 tonnes in April to 328 tonnes.
Since May 2019, when it stood at 78 tonnes, the bank’s use of gold swaps and derivatives has risen by more than 300 percent.
The BIS uses gold swaps and other gold derivatives to gain access to gold held by commercial banks and then 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 the BIS’ annual reports.
Recently the BIS published a working paper titled “Central Bank Swaps Then and Now: Swaps and Dollar Liquidity in the 1960s,” written by Robert N McCauley and Catherine R Schenk:
The introduction to the paper states the following with the use of boldfaced italic print within this quoted section added 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 and has done so via swaps and crucially has been prepared to take on credit risk.
This invites conjecture that the use of gold swaps by the BIS is driven by the Fed.
The study provides no proof that this is the case, but that the BIS has never offered any comment on its exposure caused by being long unallocated gold and short allocated gold may well be explained by the most powerful central bank, the Fed, being the sole recipient of the unallocated gold placed in sight accounts by the BIS.
The BIS auditors who must satisfy themselves that the bank can cover its 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.
There is not enough information in the BIS’ monthly reports to calculate the exact amount of its swaps, but based on the information in its statement for April the bank’s month-end gold swaps can be estimated to be about 328 tonnes, compared to 332 tonnes at March 31, 326 tonnes at February 29, 320 tonnes at January 31, 313 tonnes at December 31, 2019, 250 tonnes at November 30, 2019, 186 tonnes at October 31, 2019, 128 tonnes at September 30, 2019, 162 tonnes at August 31, 2019, 95 tonnes at July 31, 2019, 126 tonnes at June 30, 2019, 78 tonnes at May 31, 2019, 88 tonnes at April 30, 2019, 175 tonnes at March 31, 2019, 303 tonnes at February 28, 2019, 247 tonnes at January 31, 2019, 275 tonnes at December 31, 2018, and, in 2018, 308 tonnes in November, 372 tonnes in October, 238 tonnes in September, and 370 tonnes in August.
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 the 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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