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Robert Lambourne: BIS gold swaps rose substantially in October
By Robert Lambourne
Sunday, November 12, 2017
Disclosures in the October statement of account published by the Bank for International Settlements indicate that during October the bank increased substantially its use of gold swaps and other gold-related derivatives
The information provided in the BIS monthly statement of account is not sufficient to calculate a precise amount of gold-related derivatives, including swaps, but it appears that the total exposure has risen above 570 tonnes of gold as of October 31.
This compares to an estimate of close to 500 tonnes as of August 31 and an audited figure of 438 tonnes as of March 31.
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This is the BIS' highest level of gold swaps recorded since the bank began reporting the use of gold swaps in its annual report for the financial year ended March 31, 2010.
A review of the previous use of gold derivatives by the BIS reveals that the transactions in the year ending March 31, 2010, were far more substantial than anything done by the bank in the years immediately before.
The use of gold swaps reported by the BIS in recent years is summarized here:
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.
As the table shows, the use of gold swaps by the BIS fell from 2013 to zero in March 2016. In the financial year ending in March 2017 a new year-end peak of 438 tonnes was reported.
In addition, while the BIS has been making record use of gold derivatives, the bank's traditional gold banking business has been in decline, with far less gold being deposited by central banks in BIS-controlled gold sight accounts.
In March 2010 gold swaps represented just 20 percent of the gold that the BIS had placed in gold sight accounts with central banks. By March this year 59 percent of the gold placed by the BIS in gold sight accounts with central banks had come from gold swaps and other gold derivatives.
From the BIS statement of account for October 2017 it appears that gold swaps and other gold-related derivatives accounted for 66 percent of the gold the BIS had placed in gold sight accounts at central banks.
Hence gold derivatives have become the dominant source of gold used in the BIS' banking business. But the BIS has not highlighted or explained this change.
Indeed, the BIS has offered no explanation for its renewed use of gold swaps since March 2016. By contrast, on July 29, 2010, the BIS discussed its gold swaps with the Financial Times. BIS General Manager Jaime Caruana said then that the gold swaps were "regular commercial activities" for the bank:
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.'"
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 coincidentally, the BIS has renewed its use of gold swaps since March 2016 just when many commentators consider gold market conditions to be tightening again, as they were in 2010 and 2011.
Robert Lambourne is a GATA consultant and a retired business executive in the United Kingdom who studies the activity of the Bank for International Settlements in the gold market.
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