The falling levels of gold swaps might indicate…
By Robert Lambourne via GATA
The recently released September statement of account of the Bank for International Settlements —
— shows little change in the bank’s use of gold swaps for the second month running. The gold swaps outstanding at September 30 are estimated to be 57 tonnes versus 75 tonnes and 56 tonnes as of August 31 and July 29, respectively. This recent level is much reduced from the level of swaps at June 30, which was 202 tonnes.
As is clear from Table B below, the level of swaps had been significantly higher in the first half of the year. For example, at the end of January 2022 there were gold swaps of 501 tonnes.
Once again it is evident that the BIS remains an active trader of significant volumes of gold swaps on a regular basis, and the recent data indicates that a downward trend in the bank’s swaps is continuing. Certainly the current level of gold swaps is well below the levels reported in Table B below since August 2019.
The falling levels of gold swaps might indicate an exit from the swaps due potentially to “Basel III” regulations. As is usually the case with the BIS, it seems unlikely that any extra information on its use of gold swaps will be forthcoming.
… Historical context …
The BIS rarely comments publicly on its gold 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 July 29, 2010, coinciding with publication of the bank’s 2009-0 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 carried out with commercial banks and so did not involve central banks.
It also seems highly likely that the BIS’ remaining swaps are still all made with commercial banks, because the BIS annual report has never disclosed a gold swap between the BIS and a major central bank.
The swap transactions potentially create a mismatch at the BIS, which may end up being long unallocated gold (the gold held in BIS sight accounts at major central banks) and short allocated gold (the gold required to be returned to swap counterparties). This possible mismatch has not been reported by the BIS.
The gold banking activities of the BIS have been a regular part of the services it offers to central banks since the establishment of the bank 90 years ago. The first annual report of the BIS explains these activities in some detail:
A June 2008 presentation made by the BIS to potential central bank members at its headquarters in Basel, Switzerland, noted that the bank’s services to its members include secret interventions in the gold and foreign exchange markets:
The use of gold swaps to take gold held by commercial banks and then deposit it in gold sight accounts held in the name of the BIS at major central banks doesn’t appear ever to have been as large a part of the BIS’ gold banking business as it has been in recent years, although the recent declines do seem to suggest this is changing.
As of March 31, 2010, excluding gold owned by the BIS, there were 1,706 tonnes held in gold sight accounts at major central banks in the name of the BIS, of which 346 tonnes or 20% were sourced from gold swaps from commercial banks.
If the BIS was adopting the level of disclosure made by publicly held companies, such as commercial banks, some explanation of these changes probably would have been required by the accounting regulators. This irony may not be lost on those dealing with regulatory activities at the BIS. Presumably the shrinkage of the BIS’ gold banking business shows that even central banks now prefer to hold their own gold or hold it in earmarked form — that is, as allocated gold.
A review of Table B below highlights recent BIS activity with gold swaps, and despite the recent declines, the recent positions estimated from the BIS monthly statements remain large, especially in early 2022, and the volume of trading has been significant.
No explanation for this continuing use of swaps has been published by the BIS. Indeed, no comment on the bank’s use of gold swaps has been offered since 2010.
This gold is supplied by bullion banks via the swaps to the BIS. The gold is then deposited in BIS gold sight accounts (unallocated gold accounts) at major central banks such as the Federal Reserve.
The reasons for this activity have never been fully explained by the BIS and various conjectures have been made as to why the BIS is facilitating it. One conjecture is that the swaps are a mechanism for gold secretly supplied by central banks to cover shortfalls in the gold markets to be returned to the central banks. The use of the BIS to facilitate this trade suggests a desire to conceal the rationale for the transactions.
As can be seen in Table A below, the BIS has used gold swaps extensively since its financial year 2009-10. No use of swaps is reported in the bank’s annual reports for at least 10 years prior to the year ended March 2010.
The February 2021 estimate of the bank’s gold swaps (552 tonnes) was higher than any level of swaps reported by the BIS at its March year-end since March 2010. The swaps reported at March 2021 were at the highest year-end level reported, as is clear from Table A.
Table A — Swaps reported in BIS annual reports
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.
March 2019: 175 tonnes
March 2020: 326 tonnes
March 2021: 490 tonnes
March 2022: 358 tonnes
The table below reports the estimated swap levels since August 2018. It can be seen that the BIS is actively involved in trading gold swaps and other gold derivatives with changes from month to month reported in excess of 100 tonnes in this period.
Table B — Swaps estimated by GATA from BIS monthly statements of account
Month ….. Swaps
& year … in tonnes
Apr-22 ….. /315
Mar-22 …. /358
Feb-22 …. /472
Jan-22 ….. /501
Sep-21 …. /438
Aug-21 …. /464
Jul-21 …. /502
Apr-21 …. /472
Jan-21 …. /523
Dec-20 …. /545
Nov-20 …. /520
Oct-20 …. /519
Jul-20 ….. / 474
Jun-20 …. / 391
May-20 …. / 412
Apr-20 …. / 328
Mar-20 …. / 326*
Feb-20 …. / 326
Jan-20 …. / 320
Dec-19 …. / 313
Nov-19 …. / 250
Oct-19 …. / 186
Sep-19 …. / 128
Aug-19 …. / 162
Jul-19 ….. / 95
Jun-19 …. / 126
May-19 …. / 78
Apr-19 ….. / 88
Mar-19 …. / 175
Feb-19 …. / 303
Jan-19 …. / 247
Dec-18 …. / 275
Nov-18 …. / 308
Oct-18 …. / 372
Sep-18 …. / 238
Aug-18 …. / 370
± The estimate originally reported by GATA was 487 tonnes, but the BIS annual report states 490 tonnes, It is believed that slightly different gold prices account for the difference.
* The estimate originally reported by GATA was 332 tonnes, but the BIS annual report states 326 tonnes. It is believed that slightly different gold prices account for the difference.
GATA uses gold prices quoted by USAGold.com to estimate the level of gold swaps held by the BIS at month-ends.
As noted already, the BIS in recent times has refused to explain its activities in the gold market, nor for whom the bank is acting:
Despite this reticence the BIS is almost certainly acting on behalf of central banks in taking out these swaps, as they are the BIS’ owners and control its Board of Directors.
This refusal to explain prompts some observers to believe that the BIS acts as an agent for central banks intervening surreptitiously in the gold and currency markets, providing those central banks with access to gold as well as protection from exposure of their interventions.
A report published by Bullion Star’s Ronan Manly on the Bank of Portugal’s use of its gold reserves reinforces this point as the Bank of Portugal confirms that 20 tonnes of its gold is stored with the BIS:
This disclosure seems a little economical with the truth as the BIS has no gold storage facilities of its own. Gold held by the BIS on behalf of central banks is either deposited into a BIS gold sight (unallocated) account or a BIS earmarked (allocated) gold account and deposited normally with one of the central banks based at a major gold trading center, such as the Federal Reserve in New York.
Since Manly shows that the Bank of Portugal is focused on earning income from its gold, it seems likely that this gold is held in a BIS sight account, though its ultimate location is unclear.
It is possible that the swaps provide a mechanism for bullion banks to return gold originally lent to them by central banks to cover bullion bank shortfalls of gold. Some commentators have suggested that a portion of the gold held by exchange-traded funds and managed by bullion banks is sourced directly from central banks.
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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