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Yesterday
the Financial Times published an article headlined "BIS Gold Swaps Mystery
Is Unravelled" in an attempt to clarify the recently discovered gold
swaps undertaken by the Bank for International Settlements with European
commercial banks:
http://www.ft.com/cms/s/0/3e659ed0-9b39-11df-baaf-00144feab49a.html
I
recently published my interpretation of these gold swaps and concluded that they
were most likely a secret bailout of one or more bullion banks that do not
have enough physical gold to meet burgeoning demand:
http://www.gata.org/node/8803
Lawyers
always tell their clients to shut up and not speak to the press because the
more they say without proper legal consultation, the more likely they are to
incriminate themselves. One has to wonder why lawyers at the BIS didn't offer
similar advice to the spokespeople at the BIS, because they have opened their
mouths and inserted both feet.
The FT
reports that "Jaime Caruana, head of the BIS, told the FT the swaps were
'regular commercial activities' for the bank."
The FT
also reports that "'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."
So we
are led to believe that the BIS just casually called up some commercial banks
and proposed a "regular commercial" activity of a 346-tonne gold
swap.
The
only problem with this story is that this is the biggest gold swap in
history. It was anything but a "regular commercial activity."
The FT
tries to palm off the biggest gold swap in history as just a matter of the
BIS earning a little return on $14 billion.
The FT
says it has learned that the swaps, which were initiated by the BIS, came as
the so-called "central banks' bank" sought to obtain a return on
its huge U.S. dollar-denominated holdings. The BIS asked the commercial banks
to pledge a gold swap as guarantee for the dollar deposits the banks were
taking from the Basel-based institution.
And
GATA has learned that the moon is made of Swiss cheese.
In
central banking $14 billion is chump change. The U.S. Treasury auctions
between $70 billion and $130 billion of Treasury debt very other week. Only a
few weeks ago the European Central Bank created a trillion dollars out of
thin air to defend the euro amid the Greek debt crisis.
There
are two sides to a swap transaction, but one would have to have the IQ of a
grapefruit to believe that the important part of this transaction is a
piffling $14 billion and not the 346 tonnes of gold that make it the biggest
gold swap in history.
But
the BIS has given us another piece of information.
The FT
says: "Three big banks -- HSBC, Societe Generale, and BNP Paribas --
were among more than 10 based in Europe that swapped gold with the Bank for
International Settlements in a series of unusual deals that caused confusion
in the gold market and left traders scratching their heads."
I had
assumed in my last article that only one bullion bank was involved, but we
now find that more than 10 banks were involved. The first on the list is none
other than HSBC, which along with JPMorganChase holds 95 percent of all gold
and precious metals derivative positions among U.S. commercial banks as
reported to the U.S. Treasury Department. HSBC and JPMorganChase are also
holding a massive short position in gold and silver on the New York Commodity
Exchange. Further, HSBC is the custodian of the gold that is supposedly
backing the exchange-traded fund GLD.
In my
analysis of the BIS swaps I postulated that a bullion bank had made a swap
with one or more central banks and had obtained bullion in exchange for $14
billion. I further postulated that the bullion bank made another swap with
the BIS whereupon the BIS gave the bank $14 billion but the bullion bank did
not hand over the gold to the BIS but instead credited the BIS with a ledger
entry of gold in the BIS unallocated gold account. This would allow the
bullion bank to have real gold to meet burgeoning demand while the accounts
would show that the same gold had been credited to the BIS.
The FT
says: "Officials said other commercial banks obtained the gold from the
lending market, borrowing bullion from emerging countries' central
banks."
So the
tripartite nature of this shady transaction is confirmed -- central banks
were a source for the real gold. But the real gold wasn't the
"gold" that the BIS received as a swap for $14 billion. The FT
explains:
"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."
But
unallocated gold is not gold at all. It is not gold that has been deposited
that is loaned to someone else. It is gold that has been deposited that is
loaned simultaneously to many other people. I have estimated that for each
ounce in their vaults the bullion banks have loaned or sold 45 ounces.
So the
FT's story appears to confirm my thesis that the BIS has been credited with
346 tonnes of ledger-entry gold in the BIS unallocated gold accounts held
with the bullion banks. This makes the BIS an "unsecured creditor"
of the bullion banks as defined by the London Bullion Market Association's
description of "unallocated account" holders.
The FT
story suggests that at least 10 bullion banks needed physical gold bullion
desperately. This looks like a rerun of the 1960s London Gold Pool fiasco
where central banks dishoarded gold to meet massive investor demand in a
futile attempt to maintain a gold price of $35 per ounce.
I have
spelled out in recent articles that there is a run on the bullion banks has
begun and is gaining momentum. Investors and institutions are realizing that
"unallocated gold" is not gold at all but just an unsecured promise
for gold. So investors and institutions are starting to demand delivery of
their metal, and as there is only 1 ounce backing each 45 ounces that are
claimed, the situation is turning into what will be a short squeeze of epic
proportions.
The FT
says: "Investors have bought physical gold in record amounts during the
past two years and deposited it in commercial banks. European financial
institutions are awash with bullion and some are trying to pledge gold as a
guarantee."
As
Jeffrey Christian of CPM Group has explained, the "physical" gold
market is in fact a misnomer as that market is actually a paper market backed
by only a small amount of physical gold:
http://www.cpmgroup.com/free_library1/HEDGING_AND_DERIVATIVES/Bullion_Ba...
So
investors have bought a record amount of "physical gold," which is
actually paper gold that they have never seen, and only about 2.3 percent of
what has been sold actually exists. The bullion banks are "awash"
with liabilities for the record amount of gold they are supposed to be
holding. Investors are now distrusting the bullion banks and are asking for
delivery, so is it surprising that the record amount of "physical gold"
sales has led to a record gold swap being transacted to give the bullion
banks liquidity?
The
International Monetary Fund has been surreptitiously selling gold at a clip
of around 15 tonnes per month since February without any official
announcements and without disclosing the recipients. This is another sign
that the bullion banks are in serious trouble.
When
45 ounces of gold are sold but only 1 ounce is sourced, the result is a
massive suppression of the gold price. But the converse is also true: When 45
ounces of gold are demanded for every 1 ounce that is in the vault, the price
explosion is beyond imagination.
What
is unravelling is not the mystery of the BIS gold swaps, as claimed by the
Financial Times, but the unravelling of the gold price suppression scheme
itself.
Adrian Douglas
Marketforceanalys.com
Adrian
Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.
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