Volatility continues in the level of gold swaps undertaken by the Bank for International Settlements, the central bank of the central banks.
After increasing 39% in May, BIS gold swaps fell 54% in June, according to the bank's June 30 statement of account, published this week:
https://www.bis.org/banking/balsheet/statofacc230630.pdf
The bank's gold swap position is estimated to be 87 tonnes as of June 30, down 101 tonnes from 188 at May 31 and 135 tonnes at April 30.
The bank's gold swaps had fallen to zero as of December 31, 2022.
Once again it seems probable that the BIS has entered these swaps on behalf of the U.S. Federal Reserve.
The basic transaction that the BIS is believed to undertake is to swap dollars for gold transferred from a bullion bank and then deposit this gold in a gold sight account at a central bank, presumed to be the U.S. Federal Reserve but almost certainly being the central bank that is using the BIS to execute the gold swap on its behalf.
Given the recent volatility, most BIS gold swaps are probably of short duration. Why a central bank needs the BIS to undertake these gold swaps isn't clear, but the swaps are likely connected with short-term trading needs, which could include suppressing the gold price.
The gold price fell to $1,920 at June 30 from $1,966 at May 31 (per USAGold.com) and so the decline in gold swaps may be related to efforts to drive the gold price down in June. Much of GATA's research on gold price suppression indicates that an active policy of price suppression began more than 30 years ago and was meant primarily to suppress interest rates. This article from 2005 is relevant and highlights work in this area by former U.S. Treasury Secretary and Harvard University President Lawrence Summers:
https://goldensextant.com/gibsonsparadox/
In this context the following report issued by GATA in 2007 concerning an analysis of the gold market by Frank Veneroso is really worth reading again as it confirms that GATA’s primary assertions are plausible.
https://www.gata.org/node/5275
Using the June 30 gold price of $1,920, the 87 tonnes of BIS gold swaps are valued at about $5.4 billion. (Their value at May 31 was about $11.9 billion.) So the recent trading in BIS gold swaps is of high monetary value and shows that gold remains a significant monetary asset still actively traded by central banks.
As ever with the BIS, it remains unlikely that more information about the reasons for the bank to undertake these transactions will ever be provided. This secrecy implies that central bank gold policy involves much deception -- that it is currency market intervention for one or more central banks for which the BIS provides camouflage.
For example, the BIS' recently published 2023 Annual Report --
https://www.bis.org/about/areport/areport2023.pdf
-- does not provide any information on the gold swaps other than confirming that gold swaps covering 77 tonnes were in place as of March 31, 2023. This compares to an original estimate made by GATA of 78 tonnes:
https://www.gata.org/node/22660
The worsening finances of Western nations, especially the United States, may reduce the appeal to the BIS of undertaking gold swaps and possibly even the appeal of swaps to the central bank or banks for which the BIS has been acting. So a report issued by GATA in 2012 is worth revisiting as it highlights the acknowledgment of gold price suppression by a former chairman of the BIS, Jelle Zijlstra, a Dutch politician, economist, and central banker. It seems likely that BIS management understands what the swaps are being used for and why they must be camouflaged:
https://www.gata.org/node/11304
The continuing conundrum facing the Federal Reserve about raising dollar interest rates should reduce the appeal to the Fed of having to return swapped gold. Despite its rhetoric about pushing interest rates higher, the Fed needs to avoid more erosion of confidence in the U.S. Treasuries market when the U.S. government’s ever-increasing debt has been so controversial recently. The Treasury Department’s June report demonstrates three continuing adverse trends that seem to be worsening: lower cumulative revenues than during the same period a year ago, higher cumulative expenditures, and much higher interest costs aided by the higher interest rates set by the Fed. The Treasury's June report shows receipts of $418 billion compared to $461 billion in June 2022 and outlays of $646 billion compared to $550 billion in June 2022.
https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0623.pdf
The cumulative interest charge on the externally held debt of the U.S. government is up by 39% at June 30 compared to the same period in 2022 and indicates the problem caused for U.S. government borrowing by higher interest rates. At May 31, 2023, the comparable increase was 33%, so it is clear that there is a worsening trend in outgoing interest on borrowings.
In these circumstances the room for the Fed to raise interest rates much more seems restricted and hence it seems that the BIS and some of its shareholders might be questioning the role of the bank in these swaps and the obligation to make future deliveries of gold, since the Fed may be unable to move interest rates high enough to contain inflation. One factor is the evidence of recently increased prices for oil and a possible trend of yet higher prices because of falling U.S. oil production.
Indeed, a cynic might claim that the recent suspension of the federal government's debt ceiling makes it easier to defend a banking crisis by allowing the U.S. government to offer additional bank deposit guarantees. The debt ceiling deal may even make a revaluation of gold easier for the United States to carry out.
As is clear from Table B below, BIS gold swaps were significantly higher in the first half of last year, and the October and December totals were easily the lowest in more than four years.
* * *
Table A below highlights the level of gold swaps reported in the annual reports of the BIS back to 2010, when the bank's use of gold swaps appears to have begun. At only one year-end since then, in March 2016, has the swap level been zero.
The BIS' recently published 2023 annual report, cited above, discloses that the BIS still holds 102 tonnes of its own gold and that few of its activities in derivatives involve central banks. An assumption that the gold held by the BIS remains at 102 tonnes has been used to make the estimate of the bank's gold swap level for December. The low level of derivatives reported by the BIS using central banks as counterparties at the year end seems a sensible reason to assume that the swaps are almost certainly done with gold bullion banks rather than central banks. Historically, the first swaps described below were done with bullion banks.
* * *
... Historical context ...
The BIS rarely comments publicly on its gold 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 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 carried out with commercial banks and so did not involve central banks. It also seems highly likely that the BIS' remaining swaps are still all made with commercial banks, because the BIS annual report has never disclosed a gold swap between the BIS and a major central bank.
The swap transactions potentially created a mismatch at the BIS, which may have ended up being long unallocated gold (the gold held in BIS sight accounts at major central banks) and short allocated gold (the gold required to be returned to swap counterparties). This possible mismatch has not been reported by the BIS.
The gold banking activities of the BIS have been a regular part of the services it offers to central banks since the bank's establishment 90 years ago. The first annual report of the BIS explains these activities in some detail:
http://www.bis.org/publ/arpdf/archive/ar1931_en.pdf
A June 2008 presentation made by the BIS to potential central bank members at its headquarters in Basel, Switzerland, noted that the bank's services to its members include secret interventions in the gold and foreign exchange markets:
https://www.gata.org/node/11012
The use of gold swaps to take gold held by commercial banks and then deposit it in gold sight accounts held in the name of the BIS at major central banks doesn’t appear ever to have been as large a part of the BIS’ gold banking business as it has been in recent years, although the recent declines suggest this is changing.
As of March 31, 2010, excluding gold owned by the BIS, there were 1,706 tonnes held in the name of the BIS in gold sight accounts at major central banks, of which 346 tonnes or 20% were sourced from gold swaps from commercial banks.
If the BIS was adopting the level of disclosure made by publicly held companies, such as commercial banks, some explanation of these changes probably would have been required by the accounting regulators. This irony may not be lost on those dealing with regulatory activities at the BIS. Presumably the shrinkage of the BIS' gold banking business shows that even central banks now prefer to hold their own gold or hold it in earmarked form -- that is, as allocated gold.
A review of Table B below highlights recent BIS activity with gold swaps, and despite the recent declines, the recent positions estimated from the BIS monthly statements have regularly been large, especially in early 2022, and the volume of trading has been significant.
No explanation for this continuing use of swaps has been published by the BIS. Indeed, no comment on the bank's use of gold swaps has been offered since 2010.
This gold is supplied by bullion banks via the swaps to the BIS. The gold is then deposited in BIS gold sight accounts (unallocated gold accounts) at major central banks such as the Federal Reserve.
The reasons for this activity have never been fully explained by the BIS and various conjectures have been made as to why the BIS has facilitated it. One conjecture is that the swaps are a mechanism for the return of gold secretly supplied by central banks to cover shortfalls in the gold markets. The use of the BIS to facilitate this trade suggests of a desire to conceal the rationale for the transactions.
As can be seen in Table A below, the BIS has used gold swaps extensively since its financial year 2009-10. No use of swaps is reported in the bank's annual reports for at least 10 years prior to the year ended March 2010.
The February 2021 estimate of the bank's gold swaps (552 tonnes) was higher than any level of swaps reported by the BIS at its March year-end since March 2010. The swaps reported at March 2021 were at the highest year-end level reported, as is clear from Table A.
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Table A -- Swaps reported in BIS annual reports
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
March 2021: 490 tonnes
March 2022: 358 tonnes
March 2023: 77 tonnes
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The table below reports the estimated swap levels since August 2018. It can be seen that the BIS is actively involved in trading gold swaps and other gold derivatives with changes from month to month reported in excess of 100 tonnes in this period.
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Table B -- Swaps estimated by GATA from BIS monthly statements of account
Month .... Swaps
& year .... in tonnes
Jun-23 .... /87
May-23 .... /188
Apr-23 .... /135
Mar-23 .... /77*
Feb-23 ... /136
Jan-23 .../103
Dec-22 ... /0
Nov-22 ... /105
Oct-22 ..... /7
Sep-22 ...../57
Aug -22 ..... /75
Jul-22 ..... /56
Jun-22 ..... /202
May-22 ..... /270
Apr-22 ..... /315
Mar-22 .... /358
Feb-22 .... /472
Jan-22 ..... /501
Dec-21.... /414
Nov-21.... /451
Oct-21.... /414
Sep-21 .... /438
Aug-21 .... /464
Jul-21 .... /502
Jun-21 ..../471
May-21 ..../517
Apr-21 .... /472
Mar-21.... /490±
Feb-21 ...../552
Jan-21 .... /523
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 78 tonnes, but the BIS annual report states 77 tonnes. It is believed that slightly different gold prices account for the difference.
± The estimate originally reported by GATA was 487 tonnes, but the BIS annual report states 490 tonnes, It is believed that slightly different gold prices account for the difference.
** The estimate originally reported by GATA was 332 tonnes, but the BIS annual report states 326 tonnes. It is believed that slightly different gold prices account for the difference.
GATA uses gold prices quoted by USAGold.com to estimate the level of gold swaps held by the BIS at month-ends.
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As noted already, the BIS in recent times has refused to explain its activities in the gold market, nor for whom the bank is acting:
https://www.gata.org/node/17793
Despite this reticence the BIS has almost certainly acted on behalf of central banks in taking out these swaps, as they are the BIS’ owners and control its Board of Directors. Historically, the BIS has often acted on behalf of the Federal Reserve.
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 their interventions.
As mentioned above, it is possible that the swaps provide a mechanism for bullion banks to return gold originally lent to them by central banks to cover bullion bank shortfalls of gold. Some commentators have suggested that a portion of the gold held by exchange-traded funds and managed by bullion banks is sourced directly from central banks.
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