The gold
market and the BIS
The Financial Times
published
a story on 29 July to clarify the gold transaction
hidden at the back of the Bank for International
Settlements’ latest annual report. This clarification is
about as effective as headlights in thick fog and has
set off a fair amount of speculation in the gold
blog-o-sphere. The FT article is important, because it
is a fair assumption that the journalists who wrote it
will have cleared its factual basis with the BIS so far
as the BIS is concerned.
The hard facts are few.
We know that the BIS entered into a gold swap agreement
with several commercial banks involving 346 tonnes of
gold, worth about $14bn at current prices: that much has
been reluctantly revealed in a statement by BIS.
However, the BIS does not possess 346 tonnes of gold;
the official figure as declared in the World Gold
Council statistics at the end of 2009 showed the BIS
holding less than 120 tonnes. Either the BIS has more
gold than it is letting on (highly unlikely), or most if
not all of it has come from somewhere else.
It is worth pointing out
that the BIS does not usually deal with commercial
banks, restricting its activities to central banks,
which is why it is known as the “central banks’ bank”.
Furthermore, this transaction, which is dismissed by the
BIS as routine, is probably the largest gold swap in
history. Bizarrely, it even dismissed the transaction as
“normal” and in line with its policy of “obtaining a
return on its US dollar denominated holdings”. But some
or all of this gold does not even belong to it.
So, what did the FT
story add to our knowledge?
The story is interesting
for what it said as much as the way it said it. The
transaction was initiated by the BIS, not by the
commercial banks. Given that the BIS has no direct
relationship with the commercial banks, this suggests
that the BIS was acting on behalf of one or more
unidentified central banks, probably as guarantor. This
is contrary to the impression the BIS has given.
There are two possible
reasons for this action. Firstly, a central bank may
have wished to swap gold for funds, with a view to
reversing the transaction at a later date. The central
bank would prefer the BIS as counterparty rather than
one or more bullion banks for risk purposes; and the
benefit of a swap is that ownership of the gold does not
change hands, so for reporting purposes there is nothing
to declare. Coincidently the size of the swap roughly
matches Portugal’s gold reserves, fuelling suggestions
that they may be involved.
The second possibility
is the BIS may be acting for the central banking
community in trying to suppress the gold price.
Essentially, the BIS makes central bank gold temporarily
available to the bullion banks to cover their shortages,
normally on lease. The FT article actually suggests it
is the other way round by stating: “The
BIS asked the commercial banks to pledge a gold swap as
guarantee for the dollar deposits they were taking from
the Basel-based institution”. The BIS omits to say who
does what. But it is perfectly possible to rephrase this
as, “The BIS loaned gold swapped from unnamed central
banks to a number of commercial banks in return for a
payment of its value in dollars.” The statements agree,
but the seems to be designed to give a misleading
impression.
Both the
reasons for the transaction outlined above might be
true. It is known that several governments in the euro
bloc with central banks that are unable to issue fiat
currency have gold to swap and a need for money to cover
spending deficits. While $14bn is not sufficient for a
country like Spain or Italy, it is for Portugal; and
Portugal officially has 382.5 tonnes of gold. We know
also that there has been substantial physical demand for
gold bullion and coins from citizens in Euroland and
elsewhere, which could easily amount to over 300 tonnes.
And we know that the bullion banks are short of gold in
large, undeclared quantities on their unallocated
accounts with their customers, and that some of the
bullion banks are also short of a net 700 tonnes on
Comex. A crisis has developed out of demand for bullion
that threatens to break the bullion banks, with
disastrous consequences for the wider financial
community and the central banks themselves – who are
probably the biggest creditors.
If such a crisis got out of hand, it would be a nuclear
event. And if this is the reasoning behind the BIS
swap, it makes sense to deflect all attention from the
problem. But it was admitted in the FT article that more
than 10 commercial banks were involved, confirming the
swap was addressing a market-wide, rather than an
isolated problem. The timing certainly confirms a
European angle, given the known demand for gold on the
back of the Euroland crisis. Furthermore, two of the
three banks actually named are major French banks, and
it should be remembered that French citizens through
bitter experience are natural hoarders of gold in
uncertain times. This is particularly interesting,
since there have been virtually no reports in the
international press of French citizens’ demand for gold,
yet here we have two major French banks apparently being
bailed out of their unallocated account liabilities.
There is further evidence of a European footprint in a
somewhat confused passage in the penultimate paragraph
of the FT article:
“The
gold used in the swaps came mainly from investors’
deposit accounts at the European commercial banks. Some
investors prefer to deposit their gold in so-called
“allocated accounts”, which restrict the custodian
banks’ ability to use the gold in their market
operations by assigning them specific bullion bars. But
other investors prefer cheaper “unallocated accounts”,
which give banks access to their bullion for their
day-to-day operations.”
The gold
cannot have come from allocated accounts, since that is
a custodial function. The banks operate a fractional
reserve banking system on unallocated accounts and this
ratio of bullion held to bullion liabilities is most
probably giving cause for alarm. So the fractional
relationship with unallocated accounts suggests that the
gold cannot have come from them either, without making
the position worse. The gold must have been supplied by
central banks to the commercial banks under the
agreement with the BIS. For these to be described as
“investors” is simply misleading.
The last
paragraph of the article is obfuscating: “Officials
said other
commercial
banks obtained the gold from the lending market,
borrowing bullion from emerging countries’ central
banks.” It is almost certain that emerging markets are
routinely tapped for deliverable bullion, and so the
statement is obviously correct. Its relevance to the BIS
deal is not clear and may be there just to confuse us;
the alternative, that the European central banks do not
have sufficient gold to come up with for this operation
without bamboozling the likes of India, Lebanon and
Algeria we can perhaps discount for the moment.
It is
almost certain that the panjandrums at the ECB and the
BIS have discussed this problem at their fortnightly BIS
meetings, which are held in secret. A true un-spun
press statement issued by this committee might have
summed up the position as follows:
“The
Committee is aware of a general increase in the bullion
liabilities of banks in the Euro Area and is working
with the ECB and relevant European central banks to ease
market shortages.”
The reason
we will never get the truth this plainly is that any
such admission would be rocket fuel to the gold price,
bring on the bankruptcy of the bullion banks, and the
concomitant collapse of all paper currencies.
But to
take this gold, when China, Russia, India and other
nations are aggressively accumulating it, and the
ability of the bullion banks to return swapped or leased
gold to its actual owners is one hell of a gamble. We
have probably just witnessed the last throw of the dice
in the European central banks’ attempts to suppress the
gold price.
3 August
2010
Alasdair
Macleod
