by Robert Lambourne, Gold Seek:
Gold swaps by the Bank for International Settlements rose markedly in May, according to the bank’s monthly account statement, published this week:
https://www.bis.org/banking/balsheet/statofacc230531.pdf
The bank’s gold swaps are estimated to be 188 tonnes as of May 31, a 39% increase over the 135 tonnes reported as of April 30. As shown in Table B below, recent months have brought much volatility in the level of swaps.
Evidence of the significant trading carried out via BIS gold swaps is provided by the changes in the monthly volumes of swaps since October 2022. At that time there were an estimated 7 tonnes of swaps outstanding, but this increased to 105 tonnes at November 30 and then fell back to none at December 31.
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Significant changes and continued this year, with 103 tonnes of gold swaps estimated as of January 31, followed by 136 tonnes as of February 28, 78 tonnes as of March 31, 135 tonnes as of April 30, and 188 tonnes as of May 31.
Once again it seems reasonable to suspect that the BIS has entered these swaps on behalf of the U.S. Federal Reserve. With the new deal on the U.S. federal government debt ceiling causing political turmoil in May, a rising gold price probably would have been unwelcome by U.S. authorities.
The basic transaction that the BIS undertakes with gold swaps is to exchange dollars for gold from a bullion bank and then deposit the gold in a gold sight account at a central bank, almost certainly being the central bank that is using the BIS to execute the gold swap on its behalf.
Given the recent volatility in the level of BIS gold swaps, it seems likely that the swaps are mainly of a short duration. Why a central bank would need the BIS to undertake these gold swaps isn’t clear, but the swaps may be linked to short-term trading needs. This trading could aim to suppress the gold price.
Using the May 31 gold price of $1,966 (per USAGold.com), the 188 tonnes of BIS gold swaps as of May 31 are valued at about $11.9 billion. Hence it is evident that the recent volatility in BIS gold swaps involves high value and shows that gold remains a significant monetary asset.
As ever with the BIS, it remains unlikely that more information about the reasons for the bank to undertake these transactions, presumably on behalf of a central bank client, will ever be provided. This secrecy implies that central bank gold policy involves much deception of the public and the markets — that it is a form of currency market intervention for which the BIS provides camouflage.
The worsening finances of Western governments, especially the U.S. government, may reduce the appeal of gold swaps to the BIS and the central bank or banks for which the BIS has been acting. In this context a report issued by GATA in 2012 —
https://www.gata.org/node/11304
— is worth revisiting, since it highlights acknowledgment of gold price suppression by a former chairman of the BIS, Jelle Zilstrra, a Dutch politician and economist. BIS management almost certainly understands very well what the swaps are being used for and why they are camouflaged.
The recent strength of the gold price together with the conundrum facing the Federal Reserve about raising dollar interest rates must reduce the appeal of having to return swapped gold to bullion banks.
Despite its rhetoric about pushing interest rates higher, the Fed needs to avoid more erosion of confidence in the U.S. Treasuries market when the U.S. government’s rising debt recently has been so controversial.
The Treasury Department’s May report demonstrates three continuing adverse trends. Lower cumulative revenues than were received in the same period a year ago and higher cumulative expenditure contributed to much higher interest costs aided by higher interest rates set by the Federal Reserve:
https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0523.pdf
Because of the special measures taken by the Treasury Department to avoid breaching the former debt ceiling, it seems likely that the portion of the underlying interest cost payable to government-sponsored trust funds has been underreported recently, but this presumably will be corrected in June and subsequent months, providing a clearer picture of the growing interest cost. The cumulative interest charge on the externally held debt is up by 33% over the same period in 2022, indicating the problem that higher interest costs cause for the U.S. government’s borrowing.
In these circumstances the room for the Fed to keep raising interest rates seems restricted and hence it seems that the BIS and some of its owners — other central banks — might be questioning the role of the bank in these swaps and the obligation to make future deliveries of gold.
Indeed, a cynic might claim that the recent deal on the federal government debt makes it easier to defend a banking crisis by allowing the U.S. government to offer more bank deposit guarantees. The debt ceiling deal may even make a revaluation of gold easier for the United States to carry out.
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.
