Financial Times Says European Banks Lent Their Customer's Gold to the BIS

Although it does not appear until almost the end of this article in the Financial Times, BIS Gold Swaps Mystery Unravelled, the source of the gold provided in the dollar swaps with BIS is coming from customers of about 10 European banks who are holding their gold at the banks in 'unallocated accounts.'

"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 European Banks, including HSBC, Société Générale and BNP Paribas, were desperately in need of dollars because of a repeat of the eurodollar short squeeze which we had previously identified. Their customers were withdrawing dollars previously on deposit at the banks, which were unable to meet the demand because of the deterioration of the dollar assets they held, and because of the fractional reserve nature of their operations.

So the BIS stepped in, supplementing the swap lines the ECB has with the Fed, and swapped its dollar holdings directly for the some of the banks' customer's gold. Let us be clear about this. The gold is on deposit at the banks, in the same way that customer dollars had been on deposit. I do not wish to fuss too much about it, but at the time that the BIS swaps were revealed, a noted blogger pooh-poohed it with the toss off that 'everyone knows that the European commercial banks own quite a lot of gold.' Well, in this case, the ownership is greatly exaggerated. It is on deposit, owned by other people, but utilized as an asset by the bank. There is a difference.

In lending out the gold to BIS, they were relieved of their dollar short squeeze and were able to supply their customer demands. BIS obtained a fee of some sort in the swap, and so it is happy. But it should be noted that BIS had not done gold swaps for over forty years. So why now?

The question remains unanswered though. What is the duration of the swap, and does BIS intend to hold the gold or use it in other interbank operations?

A secondary question would be: why did the banks go directly to the BIS and swap their customer's gold, rather then to the ECB which is perfectly capable of managing swaplines for currency with the BIS and the Fed. Is the Fed running out of dollars? I have an open tab in my mind that the BIS was seeking gold to balance out demands from other banks for gold, not for dollars, and the eurodollar swaps were a convenient way to do it. This story that 'the BIS had lots of dollar lying around and were itching to use them' strikes me as being of the whole cloth.

Yes, the nice high level chart the FT includes shows the spike in gold holdings at the BIS, but does this mean that it is sitting there in their reserves unencumbered, or are they leasing any or all of it out, 'putting it to work' as they say? Central banks are notorious for making little distinction between unencumbered gold assets and real assets in the vault.

But it is nice to see verification in the mighty Financial Times that if you hold your bullion gold in an 'unallocated account' even with a prestigious bank, it may very well not be there when you wish to have it, and the prices will soar as the banks scurry to cover, just as has happened twice of late with their US dollar assets.

Or you may be asked to settle in cash if there is some clause in the contract, as in the case of the ETFs or the Comex.

Why the BIS Gold Swaps Are Important and the Failure to Reform

In his recent commentary, Gold Derivatives Update: BIS Swaps, Reg Howe notes:

"Not surprisingly, revelation of these swaps has generated considerable discussion, comment and analysis by students of the gold market. What appears to have happened is that one or more central banks loaned gold to one or more bullion banks, which then swapped the gold with the BIS for cash, leaving the physical metal in place. Under this arrangement, the accounting conventions promulgated by the International Monetary Fund allow the central bank or banks to continue to count the gold in official reserves while the BIS enjoys a high level of security on the gold side of the swap."

This is how I described the swaps in a July 6 blog entry:

"Some parties have mistakenly asserted that since a swap is not a lease for accounting purposes, which is quite correct, then the gold could not have been sold. That is just a simplistic misconception. A swap transfers the benefits of the assets from one party to another for a period of time in exchange for interest paid, generally on forex received. Its does not sell the property but it transfers the mineral rights for a time, if you will.

The party that then holds that gold asset can just hold it, or they can utilize it in some way, such as leasing it out for a period of time to another party, like a bullion bank, who can subsequently sell it. These types of 'three way deals' were very commonly seen when Lehman and Bear Stearns started to unravel and they needed to be unwound, and were a key component of the whole issue of hidden counter party risks. Remember that?

So on the books of the first party there are in fact no leases or sales shown, just swaps of varying duration and terms. But the swap has delivered an asset, in this case gold, into the hands of a party who may have no qualms about leasing that asset out to a third party to obtain funds, and that third party is likely to sell it. I would of course agree that this does not PROVE anything. How can it when the books of some of the parties are still opaque, and audits rarely conducted to verify ownership. But after what we have just seen over the last three years in these games of asset merry-go-round, how can anyone just blatantly dismiss that can and likely is happening, where there is an easy profit to be made. Especially considering the past history of transactions between the bullion banks and the central banks.

Personally I would view this report as bullish for the price of gold, since it is past history, and almost certainly an indication of concerns about Comex offtake. In other words, shortages are appearing, and fresh sources of bullion are becoming increasingly difficult to find."

Quite a few of the usual suspects and industry bottom feeders have questioned the significance of these swaps, while admitting they do not understand them. So confusing, who would care. Move on, nothing to see here. By the way, strike those nutters off the guest interview lists, and make sure people know that they are persona non grata.

The significance of these swaps seems almost transparently obvious to anyone who is following the commodity markets, but Reg Howe says it quite well, and has been illuminating this smarmy little scheme for several years.

"...an integral part of gold banking in recent years has been the suppression of gold prices, not least by increasing the ratio of paper claims on gold to the underlying amount of available real metal. In this sense, if the new gold swaps disclosed by the BIS are just the latest technique for giving official support to an increasingly shaky gold banking business, they might be viewed as a short-term negative for gold prices. But in a larger sense, the growing reluctance of central banks to part with whatever gold they have left can only be a positive development for committed gold investors."

The point is that some of the central banks, led by the example of the Fed and J.P. Morgan, have been leasing out their gold inventories to the bullion banks at very low rates, without reflecting those leases on their books. Technically this does not violate any prohibitions against selling sovereign assets without the oversight and consent of the people. In the case of Gordon Brown, when you do it, you invoke the secrets act and hide the details as well.

The bullion banks have been selling that bullion into the market, artificially suppressing the price, and occasionally having to be bailed out when there is a short term 'run' on their paper obligations as in the case of the sale of England's gold by Gordon Brown.

The reason, more properly rationale, for this 'arrangement' is the linkage shown in several economic papers, including an important one co-authored by Larry Summers, that leads them to believe that their is a linkage between lower gold prices and lower interest rates on the long end of the curve. I believe they have it wrong and are ultimately mistaken, but they believe it, and that's what counts. And this will be their cover story when they are brought to justice, the Greenspan defense for his own unindicted offenses. I thought I was doing the right thing, but I was mistaken, and I am sorry.

So why should we care? For two reasons. First, this is clearly become a reverse Ponzi scheme, wherein large paper claims exist for a shrinking pool of an available physical resource, ie. central bank and bullion bank gold. The same applies for silver.

The derivatives short positions held by a few banks, like JPM and HSBC, are enormous. If the market ever breaks free of this scheme by the shorts, it is going to leave a crater in the international banking system.

And second, when one has a scheme started from good intentions that gets out of hands and is covered up by official government actions, it festers into corruption. That corruption spreads, and undermines the integrity of the institutions that it involves, namely the Treasuries and Central Banks of many of the developed countries.

"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."

Beaumont and Fletcher, The Honest Man's Fortune

Sounds a little crazy huh? The SEC dismissed the whisteblower in the Madoff scandal as a cranks for years.

At least some of the monied interests, the privileged, and their demimonde of enablers have called it such. And yet the evidence keeps coming out and confirming it, little by little. The revelation of the fractional reserve nature of the world's largest bullion exchange was a blockbuster. The Fed resists audits of their dealings in gold, and an independent audit of the gold held by the Treasury and Fed with a full and clear disclosure of any obligations on those inventories has been resisted for years.

Like Enron, the tech bubble, the housing bubble, the Madoff Ponzi scheme, financial deregulation, OTC derivatives, relaxed pension fund rules, and the financial assets bubble, this bullion bank scheme is going to blow up and collapse, and the public is going to be asked to pay the bill, and ignore all the wrongdoing for their own good.

That is why this is important. And there will be hell to pay when the day of reckoning arrives. And that is why there is such moral hazard in the policy of not seeking indictments of key figures in this financial fraud because the perpetrators think they will be able to just keep the scheme going, and then lie and deny if the time of discovery comes, as their fellows have done already.

But it hasn't happened yet. And the pigmen live life on the edge, doing what they will, with a confidence that they can talk their way out of any difficulties that may arise, maybe make a few phone calls, call in some favors from the powerful. They are just that good.

I have known several of that type personally. This is how they think, and their actions follow their beliefs in their own power, and the distance they enjoy from common humanity. This is why deterrence is an even more important factor in intellectual or white collar crimes, because belief in the con is such a pivotal element.

This is what makes Obama's reluctance to take an aggressive stand against fraud, to follow through on the will of the people in their desire for justice, such a fatal flaw. His moral ambiguities and desire to go along respectfully with the desires of the powerful, shown clearly in his appointments and key decisions, makes him a nice guy to pal around with perhaps, but a tragic failure as a leader for reform, and an American president.

And they often have a good run of it. But eventually they have trouble talking their way out of trouble, especially when they are figuratively swinging from a lamp post, or hoist with their own petard.

"Watch therefore and pray always, that you may escape all these things that will come to pass, and be among those standing with the Son of Man.” Luke 21:36

BIS and the Gold Swaps: Curiouser and Curiouser

Here is an update on the BIS Gold swap story from The Wall Street Journal via GATA's Chris Powell.

Gold swap mystery deepens as BIS gets correction from Wall Street Journal
Submitted by cpowell on 07:41PM ET Wednesday, July 7, 2010.
Section: Daily Dispatches

10:47p ET Wednesday, July 7, 2010

Dear Friend of GATA and Gold:

The Wall Street Journal this evening updated and corrected its report about the gold swaps undertaken by the Bank for International Settlements, disclosing an e-mailed statement from the BIS stating that the swaps were with commercial banks, not central banks as the newspaper first reported.

The updated story suggests that some puzzlement continues about the swaps:

"The enormous amount of gold involved, nearly tripling what the BIS itself owns, left many market participants wondering about the nature of the deals. The BIS declined to identify the commercial banks involved. ... It isn't clear what prompted the banks to borrow from the BIS instead of their central banks."

Further, without citing authority the paper says "the gold hasn't entered the open market," but "if the banks that loaned the gold are for some reason unable to make good on the loan, the BIS could opt to sell the gold in order to get its money back, which could amount to flooding the market with an unexpected boost to the global supply."

But gold being money that for years has been appreciating against nearly all currencies, as noted for you a few minutes ago here --

http://www.gata.org/node/8798

-- why would any institution want to sell gold "to get its money back?" -- unless, of course, "flooding the market" and suppressing the gold price wasn't the real objective?

Another unanswered question is where the European commercial banks got all that gold, "349 metric tons ... nearly tripling what the BIS itself owns." The European commercial banks aren't known for holding that much metal on their own account. (If you rent a safe-deposit box at a European commercial bank, you might want to check its contents in the morning.)

While the story has changed in an important way, the first principle of journalism hasn't, and journalists here haven't yet demanded information from the primary sources, the BIS and the commercial banks themselves. Nor has there been any change in the conclusion that must be drawn from the story so far. That is, the secrecy and the involvement of the BIS, an admitted gold market rigger, impugn the transaction as part of another gold market rigging scheme.