As Gold Fell 6% In February, BIS Gold Swaps Hit Record Highs

The recently reported February statement of account of the Bank for International Settlements discloses that the bank's use of gold swaps increased to about 552 tonnes, which appears to be a record high, slightly ahead of the estimate of 545 tonnes reported at the end of December. 

This record high in BIS gold swaps came in a month that saw a 6% decline in the gold price, which fell from $1,844.13

As shown by Table B below, the BIS trades significant amounts of gold swaps on a regular basis.

The latest volume of gold swaps remains larger than the 504.8 tonnes of gold held by the European Central Bank and about 50 tonnes less than the reported gold reserves of the tenth-largest national gold holding, the 612.4 tonnes held by the Netherlands. 

No explanation for this continuing high level of swaps has been published by the BIS. Indeed, the bank has issued no comment on its use of gold swaps since 2010

The gold involved is supplied to the BIS by bullion banks via the swaps. The gold is then deposited in BIS gold sight accounts at major central banks, such as the Federal Reserve. 

The BIS' use of gold swaps and derivatives has been extensive so far this year, with the level reported in recent months being the highest in the period since August 2018, as highlighted in Table B below. By contrast, in May 2019 the bank was exposed to only 78 tonnes in swaps. 

Some gold market experts, including London metals trader Andrew Maguire, say they expect the BIS to have to unwind these swaps by the end of June this year because of the new "Basel III" regulatory standards, which introduce the Net Stable Funding Ratio. The London Bullion Market Association has stated that the new ratio “will increase the capital requirements for financing and clearing precious metals transactions to 85%.” The LBMA is not in favor of this change because of the likely increase in costs. Experts like Maguire expect that "Basel III" will severely curtail "paper" gold 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 annual reports for at least 10 years prior to the year ending in March 2010. The latest estimate of the bank's gold swaps (552 tonnes) is higher than any level of swaps reported by the BIS at its March year-end since March 2010.

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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

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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 did not involve other central banks. 

Hence it is likely that the current level of gold swaps is the highest use of them by the BIS for at least 20 years. It also seems likely that the 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 that must be returned to swap counterparties). Such a mismatch has not been reported by the BIS.

The table below reports the BIS' 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 some changes from month to month in excess of 100 tonnes.

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Table B

Swaps estimated by GATA from monthly statements of account

Month ..... Swaps
& year ... in tonnes

Feb-20…....../552
Jan-20....... /523
Dec-20....... /545
Nov-20 ..... /520
Oct-20 ...... /519
Sep-20....... /520
Aug-20...... /484
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 332 tonnes, but the BIS annual report says 326 tonnes. It is believed that this difference arose because the gold price used to calculate GATA's estimate was lower than the price used by the BIS. To estimate the level of gold swaps held by the BIS at month-ends, GATA uses prices quoted by USAGold.com.

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For years the BIS has refused to explain the reasons for its activities in the gold market, nor for whom the bank is acting.

But in its gold swap activities the BIS is almost certainly acting on behalf of central banks, as they are the BIS' owners and control its Board of Directors. The BIS has advertised to central banks that its services to them include secret interventions in the gold market.

Thus the BIS likely is providing its member central banks with camouflage for their gold and currency market interventions. 

The gold swaps also may provide a mechanism for bullion banks to return gold that was lent to them by central banks to cover shortfalls of gold in the market. Some gold market observers have suggested that a portion of the gold held by exchange-traded funds and managed by bullion banks is obtained directly from central banks.

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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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