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Robert Lambourne: BIS gold swaps fell 13% in November as debt problems grew
By Robert Lambourne
Wednesday, December 11, 2024
The November statement of account for the Bank for International Settlements was published this week --
https://www.bis.org/banking/balsheet/statofacc241130.pdf
-- and it indicates that the volume of gold swaps undertaken by the BIS fell from 93 tonnes on October 31 to 81 tonnes on November 29, a decline of 12 tonnes or 13%.
Table 1 below sets out the historical level of monthly gold swaps estimated by GATA since August 2018. As is evident from the table there is still a considerable level of gold being traded via these swaps. While gold swaps are down significantly from the 501 tonnes estimated in January 2022, the level seemingly remains quite volatile, suggesting the use of swaps to cover shorter-term trading requirements.
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To repeat the point made regularly in these reports, it seems that these swaps are undertaken by the BIS for one or more of its central bank customers with the swapped gold being accounted for as being held in a BIS-registered sight account at a central bank. Given what is happening in the gold market more generally with regular central bank buying, it appears reasonable to assume that the Federal Reserve is the BIS' customer for the swaps transactions.
The evidence strongly suggests that bullion banks are the source of this gold and that the supply comes from gold registered as being held by gold exchange-traded funds (ETFs).
The 2023-24 annual report for the BIS --
https://www.bis.org/about/areport/areport2024.pdf
-- confirms GATA's estimate of the bank's gold swaps as of March 31 shown in Table 1 below: 72 tonnes.
The recently published BIS interim report for the six months to September 30 contains information that also confirms certain assumptions used to estimate the swap volumes. This includes confirmation that the BIS continued to hold 102 tonnes of its own gold. The interim report also provides strong support, via its reporting on transactions with related parties, that the swapped gold comes from bullion banks rather than central banks.
However, the BIS continues to offer no explanation for why it is undertaking gold swaps.
The BIS first reported gold swaps in its annual report for 2009-10, so gold swaps have been provided by the BIS for its customer central banks for more than 15 years. See Table 2 below for the year-end level of gold swaps reported by the BIS in its annual reports since March 2010.
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Table 1 — Gold swaps estimated by GATA from BIS monthly statements of account
Month .... Swaps
& year ... in tonnes
Nov-24 .... /81
Oct-24 .... /93
Sep-24 .... /112
Aug-24 .... /157
Jul-24 .... /148
Jun-24 .... /116
May-24 .... /109
Apr-24 .... /78
Mar-24 .... /72
Feb-24 .... /68
Jan-24 .... /117
Dec-23 .... /121
Nov-23 ..../100
Oct-23 ..../68
Sep-23 ..../96
Aug-23 ..../129
Jul-23 .... /103
Jun-23.... /87
May-23 .... /188
Apr-23 .... /135
Mar-23 .... /77
Feb-23 ... /136
Jan-23 ... /103
Dec-22 ... /0
Nov-22 ... /105
Oct-22 ..... /7
Sep-22 ...../57
Aug-22 ..... /75
Jul-22 ..... /56
Jun-22 ..... /202
May-22 ..... /270
Apr-22 ..... /315
Mar-22 .... /358
Feb-22 .... /472
Jan-22 ..... /501
Dec-21.... /414
Nov-21.... /451
Oct-21.... /414
Sep-21 .... /438
Aug-21 .... /464
Jul-21 .... /502
Jun-21 ..../471
May-21 ..../517
Apr-21 .... /472
Mar-21.... /490
Feb-21 ...../552
Jan-21 .... /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
GATA uses gold prices quoted by USAGold.com to estimate the level of gold swaps held by the BIS at month-ends.
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There seem to be no reasons to alter the assumption that the BIS is continuing to enter these swaps on behalf of the Federal Reserve. There is no evidence to suggest that any other major central bank is actively trading this much gold, and many central banks are still accumulating physical gold.
As noted above, the basic transaction that the BIS is believed to undertake is to swap dollars for gold that is transferred from a bullion bank, then to deposit this gold in a gold sight account at a central bank, presumed to be the Fed but almost certainly being the central bank that is using the BIS to execute the gold swap on its behalf.
Given the recent volatility in BIS gold swaps, it seems likely that most are of a short duration. Why a central bank needs the BIS to undertake gold swaps isn't clear. The swaps are likely connected with short-term trading needs and perhaps are being used to aid suppression of the gold price via the futures markets.
The volatility in the volume of swaps is clear from a review of Table 1 above. Volumes of swaps in 2023 and so far in 2024 remain well below the average seen in the preceding four years, but they remain significant. The gold price decreased from $2,744 at October 31 to $2,651 at November 30 (per USAGold.com).
Using the November 30 gold price, the 81 tonnes of gold swaps outstanding via the BIS at the month-end are valued at about $6.9 billion.
So the recent trading in BIS gold swaps has high dollar value and shows that gold remains a significant monetary asset still actively traded on behalf of at least one central bank, presumably the Fed.
As ever with the BIS, it remains unlikely that more information about why it undertakes these transactions will be provided. No such information was provided in the bank's recently published annual report, which covered the year ending March 31, 2024.
*
Summary of GATA research on gold price suppression
GATA's research on gold price suppression indicates that an active policy of price suppression was implemented around 30 years ago and was primarily intended to hold down interest rates. A recent update on this research is provided by the presentation GATA Secretary/Sreasurer Chris Powell made in November 2024 at the New Orleans Investment Conference:
https://www.gata.org/node/23490
This influential report from 2005 about "Gibson's Paradox" remains relevant and highlights work in this area by former U.S. Treasury Secretary and Harvard University President Lawrence Summers:
https://goldensextant.com/gibsonsparadox/
It also remains relevant to highlight the following remarks made in a speech by Summers on September 8, 1999, as reported in the book "The Wealth of Progressive Nations: The Collected Lectures of Lawrence Summers." The remarks below are an extract of a section of the speech titled "A New Economic Paradigm."
"Most important of all, the Clinton-Gore administration has established a new paradigm for the management of our nation's budget, with enormous cumulative benefits for our economy and our citizens. It has become a commonplace to remark on how exceptional today's 4.2% unemployment rate is relative to any expectation at the beginning of the decade. It is no less remarkable that today, after 8.5 years of expansion, long-term interest rates are around 2 percentage points lower than they were at its start."
From this it is reasonable to conclude that keeping interest rates lower was considered a priority by the Clinton-Gore administration and succeeding at it was thought to be "remarkable." While this is not proof that gold price suppression was undertaken specifically to reduce interest rates, it demonstrates that reducing interest rates was a priority for the U.S. government.
Further evidence of this priority is provided by an interview with former Treasury Secretary Robert Rubin about his time working in the Clinton administration after January 1993. In answer to a question on the initial decision to prioritize federal deficit reduction, Rubin remarks: "On the other hand, if interest rates go down as a result, then that will stimulate growth, and we thought that the beneficial effect of lower interest rates would outweigh the contractionary impact of the deficit reduction":
https://www.pbs.org/wgbh/pages/frontline/shows/clinton/interviews/rubin.html
Hence there is plenty of evidence that keeping interest rates low was a major goal of the Clinton administration.
In the context of gold price suppression being used to reinforce efforts to reduce interest rates, the following report issued by GATA in 2007 with an analysis of the gold market by Frank Veneroso is a notable reference as it confirms that GATA's primary assertions about gold price suppression were plausible, including under-reported sales of official gold:
https://www.gata.org/node/5275
Here is an excerpt from the report: "I find it extremely annoying that there is a hell of a lot of obvious evidence out there that something is happening in the gold market -- that there are very large supplies coming into the market -- larger than the consensus would claim -- and no one is willing to discuss it." He further notes that maybe as much as 10,000 tonnes to 16,000 tonnes of gold may have been lent out starting in the 1980s and going on into the 1990s. This extra supply of gold will have acted to suppress gold prices and resulted in double counting of official gold, which having been lent out, may have been used, for example, to satisfy jewelry demand.
An interesting and entirely separate point about the surprising developments in the mid-1990s with subdued interest rates and relatively low inflation has come to the attention of this writer and is set out in a wide ranging article by professor Russell Napier:
Within this highly informative article there is a reference to the impact caused by Chinese exports of manufactured goods since 1994 on the rate of inflation around the world. Professor Napier considers that these goods were sold at below economic value for many years and were responsible for the change toward a lower rate of inflation for most of the next 30 years in the developed world.
It seems quite a coincidence that this impact from Chinese exports happened when gold price suppression started in earnest with plausible reasons to believe this was of an intentional effort by the U.S. authorities to suppress interest rates. This may suggest that in addition to gold price suppression there was a deliberate policy to allow China to export goods at low prices as part of the effort to reduce inflation and keep real interest rates low.
In light of the efforts to suppress gold prices, this extra dimension of support for sustained lower inflation seems to this writer to provide a much more complete explanation of why this dramatic change in interest rates has happened in the last 30 years.
*
More recent trends in U.S. federal government deficits
The remarks by Rubin and Summers on the U.S. government's priorities in the 1990s are reminders of how much the financial positions of Western nations have worsened since then.
The worsening trend for Western nations, especially the United States, probably reduces the appeal to the BIS of undertaking gold swaps on behalf of any central bank where a liability to return swapped gold is incurred. The trend possibly also reduces the appeal of any such swaps to the central bank or banks for which the BIS has been acting.
A report issued by GATA in 2012 is worth revisiting as it highlights the acknowledgment of gold price suppression by a former chairman of the BIS, Jelle Zijlstra, a Dutch politician, economist, and central banker. So it seems likely that BIS management understands what the swaps are being used for and why no reasons for the transactions are given:
https://www.gata.org/node/11304
The conundrum facing the Federal Reserve about dollar interest rates has seemingly been resolved for now with the Fed's recent decisions to reduce rates with further cuts suggested for December and into 2025. What will happen after the Trump administration takes control is difficult to guess. A recent stream of announcements on a wide range of topics from efforts to cut federal spending by $2 trillion to the introduction of punitive tariffs on imports from Canada, Mexico, and China highlights the uncertain outlook.
The current federal government debt of $36.2 trillion, including $7.3 trillion of special debt, as of December 6 is already $0.7 trillion higher than at September 30, the end of the last fiscal year. This current trend seems unsustainable and unless there is a rapid change it seems inevitable that gold prices will rise substantially, either via a deliberate gold price reset or by a substantial decline in the market price of the dollar. Clearly at this level of debt a substantial increase in interest rates would hasten recognition that federal government finances are unsustainable.
The direction of oil prices after the election might prove to be an important influence on the timing of a gold price reset, if it is being considered. A strong recovery in oil prices would be damaging.
The report at the following link, which reviews the possible connection between hedge funds' basis trades in U.S. Treasuries and the Fed's program of quantitative tightening in 2022, could be read as another sign of how difficult it is to find purchasers of U.S. Treasuries at current prices:
https://www.gata.org/node/22873
Perhaps the easiest way to picture this apparent correlation is to view this chart:
https://www.gata.org/sites/default/files/Lambourne-Chart1A.pdf
This further link contains a commentary on the apparent enrichment of certain hedge funds and the individuals involved as a result of the apparent support from the Fed to the hedge fund basis trade used to effect "quantitative tightening":
https://www.gata.org/node/22972
It also seems that the incentives for foreigners to own U.S. Treasuries are diminishing as efforts to confiscate Russian assets appear to be moving forward. Saudi Arabia has apparently warned that any such confiscation may cause it to sell its holding of U.S. Treasuries.
Again, it seems appropriate to note that a report titled "Living with High Public Debt," authored by Serkan Arslanalp and Barry Eichengreen, was published in August 2023 by the Federal Reserve Bank of Kansas City. This report reinforces just how difficult it is to handle high federal government debt with spending far in excess of revenue.
The report can be found at the Kansas City Fed's internet site and at GATA's:
https://www.gata.org/sites/default/files/Living_With_High_Public_Debt_Sep_2_2023.pdf
Here is an excerpt from the conclusions:
"Looking forward, the challenges are daunting. Given aging populations, governments will have to find additional finance for healthcare and pensions. They will have to finance spending on defense, climate change abatement, and adaptation, and the digital transition. A growing number of low-income countries are already in debt distress.
"Living with high public debt therefore means avoiding steps that make a bad situation worse. This means minimizing unproductive public spending. It means targeting social transfers as a way of limiting pressures on the expenditure side. It means limiting contingent liabilities by, inter alia, adequately regulating banks and avoiding recapitalization costs.
"It means contemplating tax increases where revenues are low by international standards. It means further developing financial markets where markets are underdeveloped and where a diverse population of local investors in debt securities is absent. It means embracing legal and procedural changes that streamline and speed restructuring for countries whose debts are unsustainable.
"This modest medicine does not make for a happy diagnosis. But it makes for a realistic one."
In the circumstances, vividly described in the report, it seems unsurprising that the price of gold has increased substantially so far in 2024. The report offers yet more reason to question whether gold swaps undertaken via the BIS, probably on behalf of the Fed, are being used as part of a mechanism to suppress the dollar gold price and may even represent double-counted gold supposedly held by exchange-traded funds.
*
Debt problems in China and other countries
In recent reports the International Monetary Fund has highlighted the high level of non-financial debt in many countries, and data recently reported by the BIS for non-financial debt to gross domestic product include as of Q2 2024: Japan 394%, France 319%, China 292%, U.S. 249%, UK 229%, Germany 200%, and India 183%. Both the IMF and the BIS are clearly signaling their concerns over the debt overhang.
Recent reports in Western media on efforts by the Chinese government to stimulate its economy, especially its property sector, are relevant to supporters of gold. At least one experienced observer of the Chinese economy believes that China needs to devalue its debt and possibly achieve this by way of a gold price revaluation. Even last week saw new reports on efforts to refinance the debt of local authorities in China.
Professor Russell Napier, the author of the article cited above, published in American Affairs, includes his insights into the debt situation in China and his view that much of this debt needs to be written off. An unsaid consequence of his conclusion is that gold will rise in price in yuan (and dollars) as a result of this debt write-off, which could in theory be achieved by a gold price reset by the Chinese government. Professor Napier is the author of "The Asian Financial Crisis 1995-98" and a well-known investment adviser and economic historian.
In recent YouTube videos Napier goes further and suggests in the video that Chinese President Xi Jinping has the ability to decide when to trigger a gold price reset and that it will change global trade dramatically. A decision by China to devalue the yuan versus gold would almost certainly force the United States to follow and would probably lead to bans or extremely high tariffs on Chinese exports to the United States.
If Professor Napier is correct, then any attempts by President-elect Donald Trump to introduce substantial tariffs on Chinese exports might trigger a decision by the Chinese to reset the yuan gold price, since one of the major adverse consequences of a unilateral Chinese decision to trigger a gold price reset -- namely the loss of their export trade to the U.S. -- would have already happened.
So the price of gold could soar if Trump carries out what he has said he will do. There is plenty of recent evidence that the Chinese intend to take measures against the U.S. if punitive tariffs are introduced on imports from China. Efforts are being made by the Chinese to stop exports of certain minerals such as gallium to the U.S. and to diversify their purchases of soybeans, formerly sourced mainly from the U.S. Also, China is seeking to adopt sanctions similar to those used by the U.S. on third parties to stop them rerouting materials to the U.S.
If Trump acts more cautiously, then maybe an agreed joint U.S.-China gold price reset might occur in 2025. The chances that the U.S. federal deficit will continue to be willingly funded by foreigners in 2025 seem really bleak, not only because of the possible adverse implications of Trump's tax plans and the likely difficulty in cutting federal government spending by the target of $2 trillion, but especially as hedge funds have already been used and seemingly are really holding Treasuries only as a stopgap for maybe two years, a term that will start running out later in 2025.
In the opinion of this writer, Napier's ideas on a new financial system are credible, especially if two separate spheres of influence develop based around China and the U.S.
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Historical context of the gold swaps
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 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 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 created a mismatch at the BIS, which may have ended 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 may be changing.
As of March 31, 2010, excluding gold owned by the BIS, there were 1,706 tonnes held in the name of the BIS in gold sight accounts at major central banks, of which 346 tonnes or 20% were sourced from gold swaps from commercial banks.
If the BIS was adopting the level of disclosure 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.
Table 2 below highlights recent BIS activity with gold swaps, and despite the recent declines, the recent positions estimated from the BIS monthly statements have regularly been large, especially in early 2022, and the volume of trading has been significant.
Table 2 Year-End BIS Gold Swap Volumes
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
March 2021: 490 tonnes
March 2022: 358 tonnes
March 2023: 77 tonnes
March 2024: 72 tonnes
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Robert Lambourne is a retired business executive in the United Kingdom who consults for GATA about the involvement of the Bank for International Settlements in the gold market and about U.S. government debt.
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