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Robert Lambourne: Is BIS using swaps to recover central bank gold?

Section: Documentation

By Robert Lambourne
Saturday, February 2, 2019

Disclosures in the recent monthly statements of account published by the Bank for International Settlements show that the bank is still actively trading in gold swaps, which the bank uses to gain access to gold held by commercial banks.

There is not enough information in the monthly reports to calculate the exact amount of swaps. But based on December's statement, which was posted very late, only this week --

-- it can be estimated that the bank's gold swaps exceeded 275 tonnes at the end of the month. This compares to estimates of 308 tonnes in November, 372 tonnes in October, 238 tonnes in September, and 370 tonnes in August.

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The BIS began using gold swaps more than nine years ago. They were first disclosed in the bank's annual report for the year ended March 31, 2010. The BIS reported then that it had acquired 346 tonnes of gold through swaps.

Based on a review of the bank's annual reports, it seems that the BIS was not involved in gold swaps for at least 10 years prior to 2010. As can be seen from the following table, the BIS has used gold swaps extensively since 2010.

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.

The BIS rarely comments publicly on its banking 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 on 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 all carried out with commercial banks and so did not involve other central banks.

The FT article can be found here:

The article includes comments from people said to be familiar with the BIS' gold transactions:

"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.'"

The comments to the FT confirm that the BIS initiated the discussions on making the swaps with its potential counter parties and was the driving force behind the transactions. Since that interview in 2010 the BIS has offered no more public comments on their use of gold swaps.

Indeed, the BIS has refused GATA's request to explain its activity and objectives in the gold market and to confirm or dispute this analyst's conclusions about them:

From disclosures in the BIS' annual and semi-annual reports, it appears highly likely that the bank's gold swap activity involves only commercial banks acting as their counterparties rather than other central banks. Since the BIS initiated these transactions, it is fair to ask whether the swaps are being used to top up central bank gold holdings.

The swaps make the BIS long unallocated gold and short allocated gold, which seemss a strange position for the supposedly conservatively run central bank of the central banks. This exposure is not highlighted in the voluminous risk-management disclosures made in BIS annual reports.

The nine-year period during which the BIS has been involved with gold swaps has also seen a substantial decline in the volume of gold being deployed in the BIS' traditional gold banking business. The traditional gold banking business saw the BIS acting as an agent for central banks wishing to deposit gold on an unallocated basis with otdher central banks based in major gold trading centers.

As an example, this business allowed the gold of Germany's central bank to be deposited safely on its behalf with the Bank of England though Germany and the United Kingdom were at war from 1939 to 1945. As this traditional gold banking business has declined, there have been occasions when swaps have provided more than 50 percent of the gold deposited by the BIS in unallocated gold accounts with major central banks in gold trading centers -- an example such as occurred on March 31, 2017.

So the use of gold swaps has become an important source of gold for the BIS' banking business. Such a major change to the nature of the BIS' gold banking has not been explained by the BIS, and it seems a rather odd development since the driving force for the traditional gold banking business was presumably demand from central banks wishing to protect their gold by depositing it with the BIS rather than directly with another central bank in a gold trading center.

One could imagine that Venezuela lately might have preferred to deposit its gold at the Bank of England via a transaction with the BIS rather than directly.

The use of gold swaps to source gold to be deposited in BIS unallocated gold accounts at major central banks does not appear to fit with the original rationale for the bank's gold banking business. But it does fit the possibility of shortages of central bank gold being filled by the BIS through swaps.

Will the BIS ever explain if this assessment is wrong?


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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