The recently released August statement of account of the Bank for International Settlements --
-- shows that the recent trend of significant decreases in the bank’s gold swaps has stopped for the moment.
The total of the BIS gold swaps outstanding at August 31 was 75 tonnes versus 56 tonnes on July 29. This increase of 19 tonnes is modest, since as of June 30 there were 202 tonnes of swaps, and as is clear from Table B below, the swaps have been far higher in recent months. For example, at the end of January 2022 there were 501 tonnes of gold swaps.
It remains clear that the BIS continues to be an active trader of gold swaps on a regular basis, and the recent data still suggests that the downward trend in the bank’s swaps is continuing and if the current rate of decline is maintained the BIS may well be reporting no gold swaps by the end of the year.
The decline of the bank's gold swaps could indicate that an exit from the swaps, potentially due to “Basel III” regulations, is happening. But as usual, it seems unlikely that the BIS will provide any additional information on what is happening with its gold swaps.
... 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 create a mismatch at the BIS, which may end 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 its establishment 90 years ago. The first annual report of the BIS explains these activities in some detail:
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 members include secret interventions in the gold and foreign exchange markets:
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.
As of March 31, 2010, excluding gold owned by the BIS itself, there were 1,706 tonnes held in gold sight accounts at major central banks in the name of the BIS, 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 trend of declines, the recent positions estimated from the BIS monthly statements have remained 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.
The gold of the swaps is supplied by bullion banks 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 is facilitating it. One conjecture is that the swaps are a mechanism by which gold that was secretly supplied by central banks to cover shortfalls in the gold markets is returned to those central banks. The use of the BIS to facilitate this trade suggests of a desire to conceal the reasons 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) is 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 the highest year-end level reported, as is clear from Table A.
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.
The table below reports the estimated swap levels since August 2018. It can be seen that the BIS has been actively trading gold swaps and other gold derivatives, with changes from month to month above 100 tonnes in this period.
Table B -- Swaps estimated by GATA from BIS monthly statements of account
Month ….. Swaps
& year … in tonnes
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
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 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.
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:
Despite this reticence, in undertaking these swaps the BIS is almost certainly acting on behalf of central banks, as they are the BIS' 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 their interventions.
A recent report by Bullion Star's Ronan Manly on the Bank of Portugal's use of its gold reserves reinforces this point, since the Bank of Portugal confirms that 20 tonnes of its gold is stored with the BIS:
This disclosure seems a little economic with the truth as the BIS has no gold storage facilities of its own. Gold held by the BIS on behalf of central banks is either deposited into a BIS gold sight (unallocated) account or a BIS earmarked (allocated) gold account and usually deposited with one of the central banks based at a major gold trading center, such as the Federal Reserve in New York.
Since Manly shows that the Bank of Portugal is focused on earning income from its gold, it seems highly likely that this gold is held in a BIS sight account, though its ultimate location is unclear.
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.
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.