by Robert Lambourne, Gold Seek:
While the December statement of account of the Bank for International Settlements, the central bank of the central banks and their gold broker, showed its gold swap position had fallen to zero at the end of 2022, the bank has not gotten out of the gold swap business.
The BIS’ January statement of account, published this week —
https://www.bis.org/banking/balsheet/statofacc230131.pdf
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— contains sufficient information to estimate that the bank had taken up 103* tonnes of gold via swaps as of January 31 on behalf of one of its central bank customers. The most likely candidate as that customer seems to be the U.S. Federal Reserve.
It has been a rather wild ride for the bank’s gold swap business since October, as the estimate for that month showed only 7 tonnes of gold swaps outstanding, and then in November the estimated volume of swaps rose dramatically to 105 tonnes before swaps fell to zero at December 31.
Now the BIS swaps have risen back to more than 100 tonnes. Using the gold price of $1,927 (per USAGold.com), as of January 31 the 103 tonnes of gold swaps are valued at $6.4 billion. Hence it is evident that the recent yo-yo-ing in BIS gold swaps is significant and contradicts claims that gold is a monetary relic.
As is usually the case with the BIS, it remains really unlikely that more information about the reasons for the bank’s use of swaps and particularly the recent volatility in swaps will ever be provided.
The worsening finances of Western nations, especially the United States, may reduce the attraction of the gold swaps to the BIS and the central banks for which the BIS has been acting. While not necessarily related to the reduction in swaps sourced by the BIS, the recent strength of the gold price together with the conundrum facing the Fed about raising dollar interest rates must reduce the attraction of having to return swapped gold to bullion banks.
Despite its rhetoric about pushing interest rates higher, the Fed needs to avoid an erosion of confidence in the U.S. Treasuries market when the U.S. government’s rising debt is becoming more controversial.
Also, recent increases in interest rates are hitting federal government finances. The recently published January Monthly Treasury Report demonstrates the continuing trend of higher interest costs being reported:
https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0123.pdf
A simple extrapolation of the interest cost in the last four months to January 31 versus the same period a year ago indicates that a forecast of an annual interest cost of $1 trillion in the current fiscal year to September 30, 2023, is a reasonable possibility, even without more interest rate increases.
In these circumstances the room for the Fed to raise interest rates much further seems restricted and hence it seems likely that the BIS and some of its shareholders are questioning the role of the BIS in these swaps and becoming obliged to make future deliveries of gold, since the Federal Reserve seems unlikely to move interest rates high enough to contain inflation.
As is clear from Table B below, the level of BIS swaps had been significantly higher in the first half of last year, and the October and December totals were 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 zero.
