Gold swaps by BIS exploded in 2016 from nothing to record level

Gold swaps by BIS exploded in 2016 from nothing to record level

Disclosures in the monthly statements of account published by the Bank for International Settlements since March 2016 indicate that in the last nine months of 2016 the bank increased substantially its use of gold swaps. 

There is not enough information in the monthly reports to calculate the exact amount of swaps, but based on the information in the BIS’ December 2016 statement of account, the bank’s gold swaps likely stood in excess of 480 tonnes as of the end of the calendar year. 

This is the BIS’ highest level of gold swaps recorded in recent times.

The BIS’ annual report for its financial year ended March 31, 2010, disclosed that 346 tonnes of gold were acquired through gold swaps from commercial bullion banks. A review of the previous use of gold derivatives by the BIS reveals that the transactions in 2009-10 were far more substantial than anything done by the bank in the years immediately leading up to that.

The use of gold swaps by the BIS increased in the financial year ended March 31, 2011, with 409 tonnes of gold swaps reported. As this chart will show, that was the peak amount reported by the bank prior to this year:

March 2011: 409 tonnes.
March 2012: 355 tonnes.
March 2013: 404 tonnes.
March 2014: 236 tonnes.
March 2015: 47 tonnes.
March 2016: 0 tonnes.

As the table shows, the use of gold swaps by the BIS fell considerably up to March 2016, when the use of swaps appeared to have stopped.

The BIS offers no explanation for its renewed use of gold swaps in its interim financial statements for the 2016-17 financial year, which were published on November 7, 2016. By contrast, back in 2010 the BIS discussed its gold swaps with the Financial Times in an article published on July 29 that year. BIS General Manager Jaime Caruana said the gold swaps were “regular commercial activities” for the bank:

http://www.ft.com/cms/s/0/3e659ed0-9b39-11df-baaf-00144feab49a.html

Here are excerpts from the article:

“Some analysts speculated that the swap deals were a surreptitious bailout of the European banking system ahead of last week’s publication of stress tests. But bankers and officials have described the transactions as ‘mutually beneficial.’ …

“‘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.

“Another banker said: ‘From time to time central banks or the BIS want to optimize the return on their currency holdings.'”

It is notable that none of these comments in the FT article focused on the gold market itself but implicitly accepted that gold was being used as collateral to support dollar loans to commercial banks. 

An alternative explanation — that the swap transactions were initiated by the BIS to place more unallocated gold in the hands of certain central banks — seemed plausible, since the gold market was tight at the time. 

Perhaps not conicidentally, the BIS has renewed its use of gold swaps just when many commentators consider gold market conditions to be tight again, as they were in 2010 and 2011.

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Robert Lambourne is a business executive in the United Kingdom and a GATA consultant.

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Chris Powell

The Gold Anti-Trust Action Committee was organized in the fall of 1998 to expose, oppose, and litigate against collusion to control the price and supply of gold and related financial instruments. The committee arose from essays by Bill Murphy, a financial commentator on the Internet (LeMetropoleCafe.com), and by Chris Powell, a newspaper editor in Connecticut. Murphy's essays reported evidence of collusion among financial institutions to suppress the price of gold. Powell, whose newspaper had been involved in antitrust litigation, replied with an essay proposing that gold mining and investor interests should act on Murphy's essays by bringing antitrust lawsuits against financial institutions involved in the collusion against gold. The response to these essays was so favorable that the committee was formed and formally incorporated in Delaware in January 1999. Murphy became chairman and Powell secretary and treasurer.