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Robert Lambourne: BIS gold derivatives fall in December but remain hefty

Section: Documentation

The bank still fails to explain its activity in the gold market.

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By Robert Lambourne

Disclosures in the December 2017 statement of account published by the Bank for International Settlements --

-- indicate that during December the bank reduced 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 as of December 31, 2017, was around 450 tonnes of gold. This compares to estimates of 570 tonnes and 600 tonnes respectively at the October and November month ends and an audited swaps figure of 438 tonnes as of March 31, 2017.

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Despite the substantial reduction made in December, the BIS is still party to a substantial volume of gold swaps and the amount held is still higher than any of the year-end gold swap levels quoted in the eight-year table below. It is evident that the BIS remains an active participant in the gold swaps market with seemingly high volumes of trade taking place regularly.

When it comes to its activities in the gold market, the BIS is like a duck seeming to glide smoothly over the surface of the water, but underneath the surface it is paddling furiously to reach its destination. The bank's lack of transparency fuels the suspicion that all this underwater activity is not being properly explained.

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 this table shows, the use of gold swaps by the BIS fell considerably 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 2017 saw record use of gold derivatives by the BIS, this has been happening when 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 2017 59 percent of the gold the BIS had placed 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. The BIS itself has elected not to highlight or explain this change.

Indeed, the BIS has offered no explanation for its renewed use of gold swaps since March 2016. By contrast, back in 2010 the BIS discussed its gold swaps with the Financial Times in an article published July 29 that year. BIS General Manager Jaime Caruana said 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 retired business executive in the United Kingdom who consults with GATA about the involvement of the Bank for International Settlements in the gold market.

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