by Robert Lambourne, Gold Seek:
After 12 years in the gold swap business, the Bank for International Settlements seems to have just about gotten out.
The bank’s October statement of account, just published —
https://www.bis.org/banking/balsheet/statofacc221031.pdf
— shows that the bank’s gold swaps, which totaled 501 tonnes in January and have been falling sharply throughout the year, have crashed to only 7 tonnes as of October.
The bank’s gold swaps outstanding at September 30 were estimated to be 57 tonnes versus 75 tonnes and 56 tonnes as at August 31 and July 29 respectively.
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As is clear from Table B below, the level of swaps had been significantly higher in the first half of the year and the October total is easily the lowest in more than four years.
Table A below highlights the level of gold swaps reported in the annual reports of the BIS all the way back to 2010, when the bank’s use of gold swaps appears to have begun. At only one year-end since then, in March 2016, has the swap level been lower than it is as of October 2022.
The BIS has been an active trader of significant volumes of gold swaps on a regular basis, and the recent data indicates that there is a distinct possibility that its trading in gold swaps soon will end entirely.
The BIS half-year report to September 30, 2022, has also just been published and while it offers no direct comment on the use of gold swaps, its disclosures include confirmation that the BIS still holds 102 tonnes of its own gold and that very little of its activities in derivatives are with central banks.
This latter disclosure offers support for the assumption that the bank’s gold swaps, being derivatives, are with bullion banks rather than central banks.
The reduction in the BIS’ gold swaps could be due to the application of “Basel III” regulations to bullion banks. As is usually the case with the BIS, it seems unlikely that more information about the swaps will be released.
… 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 2009-10 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 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 have created 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 bank’s establishment 90 years ago. The first annual report of the BIS explains these activities in some detail:
http://www.bis.org/publ/arpdf/archive/ar1931_en.pdf
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:
https://www.gata.org/node/11012
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 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 disclosures 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.
