Renewed use of gold swaps by BIS indicates strain on price suppression
By Robert Lambourne
Sunday, September 18, 2016
This link provides the Bank for International Settlements' August 2016 statement of account:
This statement shows an even greater holding of gold by the BIS than was reported in July, presumably in the bank's gold banking business.
For the reasons explained below, from the BIS' monthly statements of account it is possible only to estimate the amount of gold swaps being used by the bank, but 325 tonnes seems a reasonable estimate of the gold swaps entered by the BIS during the five months since March 31, 2016.
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By Robert Lambourne
Saturday, August 27, 2016
Recent disclosures in the monthly statement of accounts published by the Bank for International Settlements indicate the bank's renewed use of a substantial quantity of gold swaps.
The annual report of the BIS 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 reveled that the transactions in 2009-10 were far more substantial than anything done in the bank's recent history.
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Yet in an article published in the Financial Times on July 29, 2010, BIS General Manager Jaime Caruana said the gold swaps were "regular commercial activities" for the bank. Here is a link to the FT article, which requires a subscription to access:
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 into the hands of certain central banks -- seemed plausible, since the gold market was tight at the time.
The use of gold swaps by the BIS increased in the financial year ended March 31, 2011, with 409 tonnes of gold swaps reported by the bank. This was the peak amount reported by the bank:
2011: 409 tonnes.
2012: 355 tonnes.
2013: 404 tonnes.
2014: 236 tonnes.
2015: 47 tonnes.
2016: 0 tonnes.
As the table makes clear, the use of gold swaps by the BIS had reduced considerably leading to March 2016, when use of gold swaps stopped.
It is an interesting coincidence that the BIS has renewed its use of gold swaps just when gold market conditions again are considered tight, as they were in 2010 and 2011.
This link accesses the July 2016 statement of account by the BIS:
From the published information it is not possible to calculate an exact amount of gold swapped, in part because the BIS has probably continued its recent policy of selling a few tonnes of its own gold each year. The bank's gold holdings have fallen from 120 tonnes in 2010 to 104 tonnes in 2016.
But it appears that the swapped by the BIS is in the range of 225 to 230 tonnes as of the end of July.
No doubt the BIS will comment at some point on its renewed use of gold swaps. But to those who consider the suppression of gold prices by central banks to be obvious, this is another sign that strain on the suppression scheme is growing.
Robert Lambourne is a business executive in the United Kingdom and a consultant to GATA.
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