la BRI ( banque des réglements internationaux ) ou BIS ( en anglais), étant la banque des banques .. pour mémo
cette étude sur une "comptabilité créative" des réserves et transactions or de cette" honorable" institution est à lire très attentivement ..comme il se doit http://www.gata.org/node/9331 http://www.gata.org/files/Lambourne-BISGold-11-09-2010.doc
INFORMATION ON THE GOLD MARKET ACTIVITIES OF THE BANK FOR INTERNATIONAL SETTLEMENTS (“BIS”) PRESENTED AT THE GOLD SYMPOSIUM IN SYDNEY ON 9TH
1. Introduction and Summary
This note is intended to document what can be learned about BIS and related central bank operations in the gold market from published sources. It is based mainly on information published by the BIS itself, including its Annual Report for 2009/10. http://www.bis.org/publ/arpdf/ar2010e.pdf?noframes=1
The principal points of interest are set out below:
- The BIS was created in 1930 and was initially used in the gold market as a facilitator of international transactions. It should be recalled that gold was used more actively in international financial transactions before WW2 (see section 2).
- The active use of gold meant that before WW2 many central banks, including the German Reichsbank, used the BIS to hold gold on their behalf in a number of major gold markets. For the Reichsbank these included Amsterdam, Berne, Brussels, London and Paris (see section 4).
- The BIS does not have and never has had its own gold storage facilities (see section 2).
- The BIS historically carried out gold related transactions through gold sight (unallocated gold) and gold earmarked (allocated gold) accounts. These forms of gold accounts are still used by the BIS and central banks today (see section 3).
- The BIS had deposited with central banks at 31st
March 2010 1,704 tonnes of gold in gold sight accounts and 212 tonnes of gold in earmarked accounts (see section 4).
-According to the monthly summary balance sheets published by the BIS the value of gold held by the BIS has increased to SDR 48.3 billion as at 31st
August 2010 from SDR 42.3 billion as at 31st
- Central banks operate different accounting classifications for gold sight accounts and for gold earmarked accounts. Normally, gold in a sight account is not designated as physical gold, but as a debtor, and a gold earmarked account is treated as physical gold (see section 3).
- Recent BIS Annual Reports offer no definition of gold sight and gold earmarked accounts, despite these terms being used in the notes to the accounts (see section 5). This is unsatisfactory, as it hinders the reader’s ability to understand the gold related disclosures in recent BIS Annual Reports (see section 5).
- The BIS defines in the 2009/10 Annual Report in note 4 to the accounts that their main gold asset is “gold bars held at central banks”.
-Yet these are all gold sight accounts, i.e. unallocated gold. This fact is difficult to discern from the BIS 2009/10 Annual Report (see Table 1 in section 5).
- The accounting policies used by the BIS with regard to gold are set out in various notes and are explained in a convoluted way. Notes 5 and 14 of the accounting policies contain key disclosures that appear to confirm that both gold sight and gold earmarked accounts are accounted as “gold bars held at central banks” (see section 5).
- The actual position – that essentially all of this gold is held in sight accounts - is confirmed in the 2009/10 Annual Report by disclosures in note 37 – related parties (see section 5). It has subsequently also been confirmed by the BIS in an e-mail to the writer.
- This accounting practice of the BIS is not consistent with the accounting policies used by central banks. Central banks cannot declare unallocated gold to be physical gold under the accounting definitions currently used (see section 3).
- Hence the BIS “gold and gold loan banking business” is essentially based on gold sight accounts (unallocated gold) whereby the BIS sources gold from central banks held in sight accounts with the BIS and then the BIS deposits the gold in sight accounts with other central banks, presumably those located at major bullion markets (see section 5).
- In 2009/10 there has been a 42% tonnage increase in the amount of gold deposited by the BIS into gold sight accounts with central banks. No explanation for this increased volume of gold held in sight accounts is provided in the BIS Annual Report.
- Since 31st
March the value of total gold and gold-related assets of the BIS has increased by SDR 6 billion as at 31st
August 2010. Part of this increase has presumably come from more gold swaps because the increase in gold deposit liabilities of the BIS in this period is only SDR 2.6 billion (see section 5).
- The BIS owns 120 tonnes of gold for its own account. All of this gold is either loaned to commercial banks or held in gold sight accounts with central banks and as such is not physical gold. In 2008/09 the BIS created a provision (now valued at SDR 23.5 million) against a gold loan to a non-bank corporate. No explanation is given about why this provision was needed (see section 5).
- Based on the disclosures in BIS Annual Reports covering the last 4 years, the recent gold/currency swaps of 346 tonnes of gold are a departure from previous practice. Gold derivatives have been used previously, but in nothing like this size (see Table 3 in section 5).
- To comply with best current reporting practice the BIS would be expected to provide an analysis of the risk of default by each asset class held in its balance sheet. This has not been done for its unallocated gold holdings (see section 5).
2. History before WW2
The BIS was created in 1930 to improve co-operation between central banks and assist with international financial transactions.
Gold was more actively used in international finance during the pre-WW2 period than now and the BIS was intended to play a major role in the gold market, facilitating transactions between central banks and other banks.
The original objectives of the BIS are described in a document published in May 1997 called INTRODUCTORY NOTE ON THE BANK FOR INTERNATIONAL SETTLEMENTS 1930 – 1945 (http://www.bis.org/publ/bisp02a.pdf
) as follows.
“The Bank for International Settlements (BIS) was established as an international financial institution, enjoying special immunities, pursuant to the Hague Agreements of 20th January 1930.
The founder shareholding members were the central banks of Belgium, France, Germany, Italy, Japan, the United Kingdom and the United States (the Federal Reserve did not take up its rights as
founder member until 1994). Within two years of its founding, nineteen other European central banks had subscribed to the Bank's capital. The Bank opened its doors in Basle, Switzerland on
17th May 1930. Its main objects were the following:1- to act as trustee or agent in regard to international financial settlements
, particularly in regard to German reparations under the so-called Young Plan adopted at the 1930 Hague Conference.2- to promote central bank cooperation3- to provide additional facilities for international financial operations.
Amongst its agreed activities the BIS was authorised to be active in the gold market. Its main customers were central banks, although it could deal not only with central banks but also commercial banks and international organisations. It was prohibited from most banking activities on behalf of governments and individuals.
The first Annual Report of the BIS published in 1931 sets out the early agreements with regard to gold trading between central banks:http://www.bis.org/publ/arpdf/archive/ar1931_en.pdf
“A conference in November of the Heads of the Exchange Departments of several important European Banks of Issue led to useful expressions of views with respect to the administration of foreign currency reserves and prepared the way for the adoption of common conditions for the purchase of gold. At present, most Central Banks have declared themselves ready to accept gold bars of the fineness of 900/1ooo, thereby facilitating the use, in international transactions, of the existing stocks of the metal. The same meeting recommended that Banks holding gold abroad should notify the Bank for International Settlements of the amount and location, in order to permit the Bank to endeavor to serve as a clearing intermediary for Banks having movements of gold to effect from market A to market B, with a view to avoiding any unnecessary physical shipment in case other Banks could be found already possessing gold in market B which they were prepared to exchange against the gold in market A. Gold of a value of more than a billion Swiss francs held abroad in New York, London, Paris, Berne, Stockholm and Copenhagen has been reported to the Bank for the foregoing purpose. In addition, the Bank itself holds in its own name, but for the account of various Central Banks, gold in New York, London and Paris.”
The ability to offset gold transactions in major bullion markets was considered highly desirable in order to reduce the costs and potential risk of physical loss arising from international gold shipments. Hence the BIS became a clearing-house for central bank gold transactions and its founders considered this to be one of its most important functions.
According to the May 1997 document, the BIS's main banking activities before the Second World War were the following:
- to manage and invest the Bank's resources
- to receive interest on these investments and, conversely, pay interest to the central banks on their deposits with the BIS.
- to grant monetary and commercial credits to central banks
- to undertake foreign exchange operations
- to undertake gold transactions:
- to settle international postal payments
- to make dividend payments
The May 1997 document reports that:
“Gold transactions undertaken by the BIS on behalf of its members
as well as for its own account became very important during the second half of the 1930s. Several central banks deposited gold with the BIS at different locations, both as "earmarked" gold
and on gold sight accounts
(it should be stressed that the BIS at its offices in Basle did not have - and still does not have - facilities of its own for storing and handling gold).
These central bank deposits allowed the BIS to carry out numerous gold transactions for its customers, namely sales, purchases, exchanges, and transports of gold in and between the various gold markets. While many gold claims and gold obligations of the different central banks were simply offset in the BIS's books, the Bank, on numerous occasions, also organised the physical transport of gold from one depository to another.
Thus, in the financial year 1936-1937 alone, nearly 100 tonnes of gold were either exchanged or transported between markets by the BIS. From late 1938, against the background of the growing threat of war, the BIS was instrumental in shipping large amounts of
gold from the European continent to New York. From October 1938 to June 1940 the BIS transported approximately 130 tonnes of gold to New York on behalf of the central banks of Belgium, Estonia, France, the Netherlands, Norway, Poland, Switzerland and the United Kingdom.
After May-June 1940 the number and importance of the gold transports organised by the BIS declined rapidly.”
The BIS published a second report in May 1997 that covers the BIS’s gold transactions with the German central bank (the Reichsbank) during WW2. This report is titled:
“NOTE ON GOLD OPERATIONS INVOLVING THE BANK FOR INTERNATIONAL SETTLEMENTS AND THE GERMAN REICHSBANK, 1ST SEPTEMBER 1939 - 8TH MAY 1945”http://www.bis.org/publ/bisp02b.pdf
This report was published as a result of public demand in the mid-1990’s to return any gold looted by the Nazis to their proper owners. The report documents all gold related transactions between the BIS and the Reichsbank. It offers an interesting insight into how gold was traded during this period and provides historical information on the use of overseas locations to store German central bank gold.
3. Gold Sight and Gold Earmarked Accounts
The above description of gold trading introduces two important types of gold account used by the BIS and central banks for gold trading. These two different account types are in use today and are mentioned in recent BIS Annual Reports, but they are not, unfortunately, defined in these Annual Reports.
The May 1997 document, INTRODUCTORY NOTE ON THE BANK FOR INTERNATIONAL SETTLEMENTS 1930 – 1945, provides the following definitions in a footnote, which have been confirmed via an email to the writer as still in use today by the BIS:
- Gold on earmarked accounts is allocated gold. The Bank's obligation with respect to gold held in such accounts is to place on demand at the disposal of its depositors, at the central bank where the deposit was constituted, the identical bars which had originally been deposited with it.
- Gold on sight accounts is unallocated gold. The Bank's obligation with respect to gold held in such accounts is to place on demand at the disposal of its depositors, at the central bank where the deposit was constituted, gold bars of the same type as it has received, up to the total fine weight standing to the credit of the account.
Together with gold loans, leases, swaps and derivatives, these two types of account form the principal means by which gold transactions are handled by the BIS and central banks. It is evident from recent BIS Annual Reports that gold sight
accounts are used to a much greater extent by the BIS than any other form of gold instrument.
In a reply to a request from the writer for a more detailed explanation of their gold accounting the BIS provided the following extra information on gold sight and gold earmarked accounts:
account is a non-interest bearing deposit with another bank by which the receiving bank agrees to return a weight of physical gold on demand to a counterparty. The obligation is to provide a weight of gold to the depositor on demand. Gold held on sight accounts is on both sides of the balance sheet of the receiving bank, since physical gold on sight accounts is fungible. The gold bars held at central banks in note 4 to the BIS financial statements are normally held on sight accounts.”
account is an obligation to return specific bars of gold to a depositor. Earmarked gold is thus not fungible. The depositor records it as an asset on his balance sheet but the receiving bank records earmarked gold deposits off balance sheet, since the economic benefits of the earmarked bars remain with the depositor who owns the specific bars.”
As mentioned above, these two types of gold demand accounts are not defined in recent BIS Annual Reports, although both are cited in the notes to the accounts. Clearly the disclosures in recent accounts would have been improved if their definitions had been provided.
The difference between accounting for gold earmarked and gold sight accounts by central banks is highlighted by the following Bank of Japan press release issued on July 27, 2000 (also see the Appendix):
‘The Bank of Japan has recently transferred its claims against the Bank for International Settlements (BIS) embodied in a "Gold Sight Account" to a "Gold Earmarked Account" with the BIS.
Gold Sight accounts are offered by the BIS to customer central banks. The Bank of Japan opened its sight account by paying US dollar cash and the BIS purchased gold using the cash. Sight account holders can withdraw the equivalent amount of gold anytime. On the Bank of Japan's balance sheet, the claims embodied in the Gold Sight Account had been booked classified as "foreign currency assets (foreign currency deposits)". http://www.boj.or.jp/en/type/release/zuiji/nt_cr/kako01/ntac03.htm
After transferring to the Gold Earmarked Account, however, the claims are now booked as "gold" together with the existing gold holdings by the Bank. It is for this reason that the Bank of Japan's gold balance has increased by 11,651,494 thousand yen as shown in the "Bank of Japan's Accounts" as of July 20, 2000.
As such, the transfer and associated change in our account are purely technical in nature and do not involve any new purchase of gold.”
Hence gold owed to the holder of a sight account is not treated as being physical gold using the accounting conventions applied by central banks. That is for central bank accounting, unallocated gold is not treated the same as allocated gold.
In section 5 below it is noted that the BIS does not follow the same accounting convention as central banks with regard to gold sight accounts. This fact is not easy to derive from the Annual Report of the BIS and it seems as if the description of the accounting is deliberately obscure.
The link below is to a 2001 IMF paper on the accounting issues arising from the accounting for so-called reverse transactions, including gold swaps and gold loans. Its relevance to this note is mainly related to comments on pages 36 and 37 of the paper. These confirm that monetary authorities were not prepared to accept that gold swaps and gold loans or deposits were transactions in gold. This opens up the possibility that double counting of gold may occur when gold swaps are made.
It appears, therefore, that there is massive official sensitivity to gold reporting and that opaque disclosures are almost an institutionalised requirement in the gold field.http://www.imf.org/external/pubs/ft/bop/2001/01-16.pdf
4. German Central Bank WW2 Gold Operations with the BIS
There has been considerable speculative comment in recent years that official German gold may have been sold or leased to assist efforts to suppress the gold price. Last year, the German central bank addressed these concerns by issuing a commentary on the situation as follows:
“The Deutsche Bundesbank keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centres. This has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centres. Moreover, the Bundesbank needs to hold gold at the various trading centres in order to conduct its gold activities. It is common practice for central banks to keep part of their gold reserves abroad.”
As described in section 1 above, the BIS published a report in May 1997 that describes gold transactions between the BIS and the Reichsbank during WW2. This report confirms that historically the German central bank had stored physical gold in a number of major gold trading centres.
The background to the report is that in 1948 the BIS had reached an agreement to locate and return looted monetary gold to an international commission for onward transmission to claimants. The investigation resulted in the restitution by the BIS of 3,740 kilogrammes of fine gold.
The report notes that the Reichsbank had originally held both gold earmarked and sight accounts with the BIS at several locations in Europe:
“Throughout the 1930s the Reichsbank had held several gold accounts with the BIS at various depositories (Amsterdam, Berne, Brussels, London and Paris), but most of these had been
emptied before the end of August 1939. The balances on these accounts were either sold, exchanged or - most frequently - sent to the Reichsbankhauptkasse in Berlin.
Consequently, at the time of the outbreak of WW2, the only gold accounts the Reichsbank still held with the BIS were a number of earmarked gold accounts held in Berne (accounts n° 5, 7, 10 and 11) and a gold sight account used for the transfer of international postal payments held in London.”
Hence it is evident that, in effect, the Reichsbank used the BIS as an agent to front its gold holdings at various gold markets in Europe and that this enabled the Reichsbank to avoid gold being confiscated at the outbreak of WW2.
This is still very much the role of the BIS today with regard to gold.
It is important to note that the BIS now has much more gold deposited with it in gold sight accounts than in earmarked gold accounts and in turn much more of the gold deposited by the BIS with central banks (presumably those located at major gold trading centres) is in sight accounts, rather than earmarked accounts. At 31 March 2010 the BIS had a total of 1,704 tonnes of gold held in sight accounts and 212 tonnes of gold in earmarked accounts.
5. Current BIS Gold Market Operations
Recent BIS Annual Reports provide some interesting information on its gold trading activities, but suffer from being opaque. Any reader prepared to stay the course with this tough-to-read (and write) section will probably conclude that this opaque form of disclosure is deliberate.
It has already been mentioned that the BIS are active users of gold sight and earmarked accounts and reference is made to them in Annual Reports, but without accompanying definitions of what they are. This is regrettable, because an understanding of gold sight and gold earmark accounts is indispensable to interpret the BIS’s disclosures in relation to gold (the definitions are in section 2 above).
As noted above, the BIS are active users of gold sight and gold earmarked accounts plus gold loans. The level of gold loans advanced by the BIS has fallen to SDR 1,442.9 million at 31 March 2010 from SDR 2,799,7 million at 31 March 2009 and SDR 4006.8 million at 31 March 2008 and SDR 3591.8 million at 31 March 2007. Given the rising price of gold during this period, the underlying level of gold loans (in terms of ounces of gold) has declined substantially in the three years.
Some activity in gold-related derivatives has been reported in the last four years, but the recently announced gold swaps appear to be much larger than anything else reported in this period. Information on this is set out in table 3 below.
Before exploring in more detail the difficulties in deciphering what recent BIS Annual Reports disclose about their gold trading activities it is necessary to remind readers that the BIS carries out two major roles in the gold market today, according to recent Annual Reports.
First, the BIS owns 120 tonnes of gold that is held on its behalf by central banks and loaned to commercial banks which it calls “Gold investment assets”. The BIS has cut its own gold holdings from 150 tonnes at 31 March 2007 to 125 tonnes at 31 March 2008 to 120 tonnes at 31 March 2009 and 31 March 2010. In 2008/09, the BIS decided to make a provision of SDR 18.5 million (now SDR23.5 million) against a gold loan made from its gold investment assets. Whilst not a major item in terms of the amount, it is notable that the accounts are silent on the reasons for this provision.
Secondly, the BIS operates a gold banking business and places gold with central banks on behalf of its customers – mainly central banks. The gold banking business at 31 March 2010 had a considerably higher level of assets than at 31 March 2009 even allowing for the increase in the price of gold. A calculation shows that the BIS gold and gold loan banking business had 1,704 tonnes of gold and gold receivables at 31 March 2010 compared to 1,198 tonnes at 31 March 2009, an increase of 42%. Most of this increase was provided by the gold swap of 346 tonnes mentioned in Table 1 below.
The BIS offers no reason for this growth and, in particular, whether it was because of a greater demand for gold from its customer central banks who hold the BIS gold banking assets or because the supply of gold to the BIS has increased and needed to be placed by the BIS.
The two gold-related activities of the BIS are highlighted in note 4 of the 2009/10 BIS Annual Report that reports on the bank’s gold assets:
|Table 1|| || |
|As at 31 March|| || |
| || || |
|Gold bars held at central banks|
|Total gold loans|
|Total gold and gold loan assets|
| || || |
|Comprising:|| || |
| || || |
|Gold investment assets|
|Gold and gold loan banking assets|
Included in “Gold bars held at central banks” is SDR 8,160.1 million (346 tonnes) (2009: nil) of gold, which the Bank held in connection with gold swap operations, under which the Bank exchanges currencies for physical gold. The Bank has an obligation to return the gold at the end of the contract.”
This disclosure, on the face of it, appears to confirm that the BIS holds on its own behalf and on behalf of its customers some SDR 41.6 billion of gold bars held at central banks plus a further SDR 1.4 billion of gold loans.
It should be recalled that the BIS does not have its own secure gold storage facilities and that all of the physical gold held by the BIS is stored at secure locations offered by central banks.
On the basis of the description given in section 2 above in the Bank of Japan’s press release on the differences in accounting for gold sight and gold earmarked, it would seem safe to conclude that the “gold bars held at central banks” should all be held in gold earmarked accounts.
This assumption is wrong. Reaching this conclusion is not straightforward, especially because the BIS Annual Report does not give a definition of either a gold sight account or a gold earmark account.
The first clue comes from note 32 of the accounts which is headed:
“Off-balance sheet items”:
“Fiduciary transactions are effected in the Bank’s name on
behalf of, and at the risk of, the Bank’s customers without
recourse to the Bank. They are not included in the Bank’s
balance sheet and comprise:
|Table 2|| || |
|As at 31 March|| || |
| || || |
|Safe custody arrangements|
|Collateral pledge agreements|
|Portfolio management mandates|
|Gold bars held under earmark|
The note includes the following comments on the gold bars held under earmark
“Gold bars held under earmark are included at their weight in gold (translated at the gold market price and USD exchange rate into SDR). At 31 March 2010 gold bars held under earmark amounted to 212 tonnes of fine gold (2009: 212 tonnes).”
From this note it appears that all earmarked gold held by the BIS on behalf of central banks is excluded from the balance sheet of the BIS. If this is the case, then none of the BIS gold assets are held in earmarked accounts. Furthermore, because the BIS has no secure gold storage facilities of their own, it seems that none of the BIS gold assets can be classified as physical gold using the definitions quoted by the Bank of Japan.
Yet note 4 of the BIS accounts – see above - refers to SDR 41.6 billion of gold being, “gold bars held at central banks”. Hence there seems to be an inconsistency, which arises because the BIS uses different accounting policies from central banks for gold sight accounts.
Confirmation that the BIS uses accounting policies which differ from those of central banks is provided by note 14 of the BIS accounting policies which contains the following statement, “Gold comprises gold bars held in custody and sight accounts.” This statement appears to confirm that both gold earmarked and gold sight accounts are included as gold assets by the BIS.
The apparent reason for treating allocated and unallocated gold as the same asset class is set out in accounting policies note 5 on page 156 of the 2009/10 Annual Report by the following statement, “All gold financial assets in these (banking) portfolios are designated as loans and receivables
and all gold financial liabilities are designated as financial liabilities measured at amortised cost.”
The reason why the BIS decided to account for all of its gold assets as a loan or receivable is not made clear. This statement constitutes a simple notification of the co-mingling in the Annual Report of allocated and unallocated gold together as a single asset class, but does not offer any explanation nor justification for why the approach taken by the BIS in this regard is different from that of central banks.
The BIS’s accounting for gold assets becomes clearer once the disclosures made in note 37 “Related parties” of the 2009/10 Annual Report are considered.
It should be emphasised that it this rather obscure accounting note, which offers a much clearer explanation of the BIS accounting for its gold assets than the mainstream accounting notes. This is highly unusual and a public company that adopted this approach would likely be criticiced.
Under the heading “Other balances with related party central banks and connected institutions” there is the following disclosure
“Gold held in sight accounts with related party central banks and connected institutions totaled SDR 41,575.7 million as at 31 March 2010 (2009: SDR 22,605.8 million)”.
Hence of the total of SDR 41,596.9 million described as “Gold bars held at central banks” in accounts note 4, all but SDR 21.2 million or 0.05%, are in gold sight accounts held with related party central banks. It is possible that the outstanding SDR 21.2 million could also be held in sight accounts, but with non-related party banks. Or it may be in allocated accounts, but this seems unlikely given the disclosures in note 32 to the accounts.
Essentially all of the so-called gold bars held at central banks, therefore, are a right to receive gold from the deposit holder, but in an unallocated form, rather than a right to reclaim specific gold bars.
The convoluted process used by the BIS in the 2009/10 Annual Report to describe their gold assets and liabilities - the main gold accounting disclosures are made in accounting policy notes 5, 14, 15, 16 and 17 - is surprising when a much simpler and clearer process is available. Namely to offer a definition of a gold sight account in the 2009/10 Annual Report and then to say that there is an amount of SDR 41.6 billion held in gold sight accounts.
To repeat the point made earlier, a private sector company adopting the BIS’s unusual and opaque approach to the disclosure of details about a major balance sheet asset, gold, would be rightly criticised.
Hence we can conclude that the BIS accounting for gold sight accounts is in direct contradiction to that quoted by the Bank of Japan. This is troubling in itself, and the apparent efforts to disguise this contradiction can only fuel suspicions that the BIS wishes to hide the extent to which they hold unallocated gold both on their own account and on behalf of their customers.
The recent use of substantial gold swaps compounds the suspicion that there is a deliberate effort to avoid transparency by the BIS in the gold market.
Table 3 (below) sets out the net exposure of the BIS to gold at its last four balance sheet dates and includes the recent gold swaps in 2009/10.
The data have been extracted from the BIS’s last three Annual Reports.
|Table 3|| || || || |
| || || || || |
| || || || || |
|Gold and gold loans|
|Derivative financial instruments|
| || || || || |
|Liabilities|| || || || |
| || || || || |
|Derivative financial instruments|
| || || || || |
|Net gold position|
|Adjustment for gold investment assets|
This shows that the BIS has achieved its stated objective of limiting its net gold exposure in their gold and gold loan banking business with a target of nil exposure.
The BIS remains exposed to its own gold holdings (called gold investment assets above) and as at 31 March 2010 these amounted to 120 tonnes – all of which is either unallocated gold or gold loans.
Table 3 also highlights the recent gold swaps of 346 tonnes arranged by the BIS and highlighted in Table 1 above.
It is clear from Table 3 that there is no recent precedent for the BIS to use this level of swapped gold as a source for its gold sight accounts held at central banks.
The swap is also interesting given that for the BIS “gold bars held at central banks” means unallocated gold. Hence the gold received by the BIS from the swap has been deposited on an unallocated basis with central banks.
A quick review of the table shows that previous use of gold derivatives has been limited and the transactions in 2009/10 dwarf anything done in the last four years. Yet in an article published in the Financial Times on 29 July 2010, Jaime Caruana, Head of the BIS, told the FT the swaps were “regular commercial activities” for the bank. http://www.ft.com/cms/s/0/3e659ed0-9b39-11df-baaf-00144feab49a.html
This statement is undoubtedly correct but, as noted above, the use of gold as collateral for the swap is clearly on a far greater scale than anything done in the last four years.
It is also intriguing that the swap creates a risk of double-counting of gold. The counter parties for the BIS gold swap can presumably account for the gold as an owned asset since the explanation of the gold swap in the 2009/10 BIS Annual Report is very specific and says “The Bank has an obligation to return the gold
at the end of the contract” (so it would appear to meet the definition of allocated gold).
However, the central bank (or banks) that hold the BIS sight account(s) containing the swapped gold can also include the gold in their stock of physical gold under the normal central bank accounting conventions.
There has been considerable comment on these gold swaps, but their impact on the increase in the BIS’s holdings of unallocated gold is striking. Experienced gold market analysts such as Reg Howe and James Turk have both remarked that the reason for the swap is much more likely to be driven by the gold market than the currency markets.
The FT itself, in the above-mentioned article, commented as follows on the reasons for the swap
“Some analysts speculated that the swap deals were a surreptitious bail-out of the European banking system ahead of last week’s publication of stress tests. But bankers and officials have described the transactions as “mutually beneficial”.
“The client approached us with the idea of buying some gold with the option to sell it back,” said one European banker, referring to the BIS.
Another banker said: “From time to time, central banks or the BIS want to optimise the return on their currency holdings.”
It is notable that none of these comments from the FT article focus on the gold market, but implicitly accept that gold was being used as collateral to support a dollar loan. The alternative that the transaction was driven by the BIS to place more unallocated gold into the hands of certain central banks is also an entirely feasible explanation.
It seems more likely, at a time when central bank selling of gold has declined and when supply shortages are rumoured to be happening, that the reason for the increase in unallocated gold held by the BIS is much more likely to be driven by a greater demand for gold by those central banks operating in the major gold centres.
A third alternative that the swap was driven by the BIS to earn a high return from the spread between its gold assets and liabilities seems unlikely given the disclosure in note 35 to the accounts in the 2009/10 Annual Report that the BIS earned an average interest rate of 0.49% on its gold loans and paid 0.42% on its gold deposit liabilities.
It is interesting to note that neither of the quotes above, attributed in the FT article to commercial bankers, seems to be a factually correct statement.
First, according to the description of the swap provided by the BIS in its 2009/10 Annual Report it does not have an “option” to sell gold back, but rather an obligation to return the original gold. If the BIS did buy gold and have an option to sell it back then it would be a very different transaction and essentially a gold purchase by the BIS.
Secondly, using gold as collateral almost certainly does not “optimise the return on the BIS’s currency holdings” because, presumably, a lower rate of interest would apply to a loan backed by gold as collateral.
Taken together with the opaque accounting used by the BIS in respect of gold and the unexplained reasons for the substantial increase in the amount of unallocated gold held by the BIS, it is hardly surprising that the explanation of the reasons for the swaps are unconvincing at a time when central banks are net buyers of gold and anecdotal evidence points towards physical gold shortages.Perhaps the swaps were the only way to get certain central banks to place their gold with the BIS as these central banks were no longer prepared to place them in gold sight accounts with the BIS.
The summary information provided by the BIS on its balance sheets since March 2010 also shows a growing level of gold held by the BIS in sight accounts, but without a corresponding increase in gold held in sight accounts with the BIS by central banks. It also shows an increase in the use of derivatives on the liability side of the BIS balance sheet – conceivably these could be further gold swaps.
The 2009/10 Annual Report of the BIS includes a comprehensive review of the risks faced by the BIS. Included in this review is a section on credit risk. This confirms that the BIS uses its own internal assessments of credit risk. Hence the BIS does not rely on the guidance of external ratings agencies to assess credit risk. Presumably the BIS has knowledge unavailable to the general market which should improve its credit risk assessment.
As already noted, the BIS has a provision of SDR 23.5 million against a gold loan made using the BIS’s own gold. The disclosures in the risk assessment portion of the 2009/10 Annual Report on page 189 and 191 are intriguing because they suggest that the original gold loan was made to a corporate (not a bank) and that the credit rating of the gold holder was assessed as BBB as at 31 March 2010 by the BIS. Other assets worth over SDR 4.25 billion are also assessed as BBB, but no provision has been made against these assets. On the face of it this seems odd because the gold holder is an unusual counter-party and its credit rating per se would not normally justify the creation of the provision.
Finally, in this chronicle of obscure accounting, it is intriguing to note that not all assets held in the BIS balance sheet are assessed for default risk. On page 188 of the BIS’s 2009/10 Annual Report it is noted that gold held in custody is excluded from the default risk assessment. This appears to be an unusual decision because the vast majority of such gold is quite clearly unallocated gold and whether it will all be returned seems to be a valid risk that should be assessed.
It would seem reasonable to accept that such an assessment would not be needed for allocated gold, but the case for extending this approach to unallocated gold is weak, especially when all other assets, including gold loans, are subject to a default risk assessment.
If there is a shortage of physical gold amongst central bankers, as claimed by GATA and others, then it could be seen as suspicious not to carry out such a risk assessment on unallocated gold. Appendix
Another example of gold in earmarked accounts being accounted for as an asset of the account holder comes from the US Federal Reserve. Currently, its holdings of gold in custody on behalf of foreign and international organisations are highlighted in the report below. http://www.federalreserve.gov/econresdata/releases/intlsumm/forassets20100731.htm