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Mysterious BIS gold swaps are likely a bullion bank bailout

Section: Daily Dispatches

By Adrian Douglas
Thursday, July 8, 2010

The latest twist in the gold swap saga of the Bank for International Settlements is intriguing, as indicated by last night's GATA Dispatch, "Gold Swap Mystery Deepens as BIS Gets Correction from Wall Street Journal":

As always, news of anything to do with the gold market is cloaked in secrecy, misinformation, and innuendo.

What we can be sure of is that the BIS news is gold-friendly.


Because the BIS was intending to keep the matter secret.

The BIS gold swaps were not announced but instead "discovered" by an analyst snooping around the BIS accounts.

Similarly the International Monetary Fund has been quietly selling gold each month since February even though for years every possibility of a gold sale by the IMF was announced X to the power N times, where X is the number of tonnes to be sold and N is the gold price.


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The BIS typically transacts with central banks but not exclusively; the BIS' own profile also mentions a "number of international institutions" with which it does business, which includes undoubtedly commercial banks and bullion banks, which are also commercial banks.

The BIS is always active in the gold market, so it cannot just transact with central banks, as the central banks need someone to make trades for them:

"The BIS offers a wide range of financial services specifically designed to assist central banks and other monetary authorities in the management of their foreign exchange reserves. As of 31 March 2010 some 130 such authorities, as well as a number of international institutions, made use of BIS financial services. Total currency deposits amounted to SDR 196 billion, representing around 3 percent of world foreign exchange reserves."

If the BIS were to trade directly with a central bank in a gold swap, the gold would act as collateral and probably would not change its physical location and cash would be given to the central bank.

But the BIS corrected The Wall Street Journal's first story, saying its swap was with commercial banks, not central banks.

While a central bank theoretically and practically could hold 380 tonnes of unencumbered gold, there is no way that a commercial bank is sitting on 380 tonnes of unencumbered gold. So the gold in the BIS swaps came from somewhere else.

The only possibility is a central bank or several central banks. (Portugal holds 380 tonnes. Just coincidence? Spain holds 280 tonnes and Greece 112 tonnes.)

So the BIS swaps look like a tripartite transaction. The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS.

Why would this be done?

This is not about currency liquidity, as the $14 billion reported raised is not liquidity; it is pocket change.

On the other hand, 380 tonnes of gold is liquidity in the gold market, where mines produce only about 2,200 tonnes per year.

If the BIS made the swap directly with a central bank, the gold would not be provided to anyone for liquidity.

If the swap was made between a commercial bank and a central bank, the commercial bank would get its hands on the gold and the gold would change location to the vaults of the commercial bank, a bullion bank.

This would require the bullion bank to hand over $14 billion of its own money.

But by doing another swap with the BIS, the commercial bank would get the money from the BIS and technically the gold would now belong to the BIS, even as it most likely would not change location and 380 tonnes of gold would be digitally credited to the BIS' unallocated gold account at the bullion bank.

In this way the central bank or banks would get cash and the BIS would get the unallocated gold as collateral and as if by magic the bullion bank or banks would get 380 tonnes of gold to bail them out for a few more weeks as massive physical demand for metal eats their lunch.

And the bullion banks would manage this without paying a dime of their own money.

Why would the BIS be a willing player in this scheme?

Because it would fall into the type of operations BIS official William S. White described in a speech in 2005 when he said that among the five objectives of central bank cooperation is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." You can find White's speech here:

With gold reaching record high prices and a run on the banks of the gold cartel gaining pace, this must be an occasion where such an asset price-influencing operation would be thought "useful" by those who are beneficiaries of the longevity of the paper currency game.

The surreptitious monthly gold sales by the IMF and this record gold swap by the BIS are reminiscent of the London Gold Pool that ended so badly in 1968. The Western central banks have rigged the gold market for so long that they can no longer think straight. The only thing they can think of is to do more of the same, hoping that this will reverse the growing mistrust of all things paper and the entire banking system.

In the words of the great philosopher Aerosmith, "Dream on!"


Adrian Douglas publishes the Market Force Analysis letter ( and is a member of GATA's Board of Directors.

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