BIS Gold Swaps: Commercial Banks Swapped Customers' Gold for US Dollar, According to Financial Times

and GATA, Gold Anti-Trust Action Committee, casts a doubtful eye.

This blog reported on the mysterious transaction between the Bank for International Settlements (BIS) and the entity (or entities) that could only be a central bank, or so it seemed at that time. Now, UK's Financial Times reports it was with commercial banks in need for US dollar.

Gold in BIS swaps said to have come from looted bank customers' deposits (CHRIS POWELL, 7/30/2010 GATA Daily Dispatches)

"If you want to believe the Financial Times, the 346 tonnes of gold swaps recently undertaken surreptitiously by the Bank for International Settlements were a matter of the BIS' requiring three of the world's biggest banks to pledge gold as collateral against U.S. dollar deposits placed with them by the BIS so the BIS could earn a little interest. According to the FT, the banks also needed to raise cash and so were glad to obtain it by collateralizing the BIS' deposits with gold.

"The FT's latest account of the transaction, published Thursday and appended here, is surely the account the BIS would like the world to settle for as curiosity about the swaps is increasing and raising concerns about the grotesque unaccountability of central banks. And as the mouthpiece of the financial establishment, the FT surely was only too happly to convey this unofficial official story. But it's a doubtful story and raises questions of its own.

"For why would the BIS deposit money with banks considered so shaky that they would have to be required to pledge gold to secure the deposits? Wouldn't U.S., British, German, or French government bonds provide sufficient income and security for the BIS' funds? The BIS' annual report suggests that the bank already holds such bonds:

http://www.bis.org/publ/arpdf/ar2010e8.pdf

"By depositing money at the three banks -- HSBC, Societe Generale, and BNP Paribas -- according to the FT -- was the BIS really hoping to earn get premium yields from the great business those banks have done lending on condominiums in Florida, Nice, and Madrid?

"And remarkably, according to the FT the gold obtained by the BIS as collateral from the three banks didn't really belong to the banks at all. Rather, as the GATA Dispatch suggested sarcastically three weeks ago (http://www.gata.org/node/8799), the gold was essentially looted from the three banks' own gold depositors." [Emphasis is mine. The article continues, with the Financial Times article appended.]

The Bank for International Settlements has positioned itself as the central bank of the world's central banks in recent years, as the bank has become wholly owned by the central banks. Its board of directors are the central bankers of the world. And it wants to earn a favorable rate on its US dollar holding of slightly under $15 billion (346 tonnes of gold times $1200 per ounce). Its balance sheet is SDR 265 billion at 30 September 2009, which is about US$400 billion (US$1 = SDR 0.6585380000 as of July 30, 2010, IMF), so $17 billion represents 3.75% of the balance sheet.

This central bank of the central banks has two representative offices, one in Hong Kong and another in Mexico City. A very peculiar choice of locations, wouldn't you say?

Whenever I see the name "BIS", my eyes always skip the middle letter.

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Secret Gold Swap Between BIS and Commercial Banks

People noticed something strange had been going on when they saw a footnote entry of 380 tonnes of gold in the annual report of B.I.S., Bank of International Settlements - the central bank for the world's central banks.

The news has been floating around in gold circles since last week.

UK's Telegraph reports:

"It takes a lot to spook the solid old gold market. But when it emerged last week that one or more banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies, there was widespread surprise and confusion.

"The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world's annual gold production and the possibility of a sell-off.

"In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold, compared with nothing the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month.

"Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. It appears to have raised $14bn for whoever's been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market." [The article continues.]

The transaction looks like a tripartite one, involving BIS, IMF, and commercial (bullion) banks, whose names include the usual suspects who have wrecked havoc in the global financial markets in the past two years - Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale.

The Telegraph article, citing a gold expert, says it is just a "swap" and not a "lease", and therefore gold is not going to be released into the market.

I'm not so sure. Instead of sitting on the gold for the duration of the swap, BIS could make good use of the gold by leasing it to commercial bullion banks earning additional interest, and the bullion banks would sell it in the market for higher-yielding debt instruments.

Why now?

Jesse's Café Américain says and I agree:

"I think the answer can be found in the setup of the market. Gold was knocking on the door of resistance at $1260, a key point that could have triggered a break away rally. At the same time, according to figures provided in his daily Comex commentary, there were an extraordinary number of contracts standing for delivery in silver and especially gold. Indeed, if the numbers are correct, a breakaway rally would have encouraged almost 2 million ounces of gold to be demanded of the Comex, a call on their 2.64 million ounces of dealer supply that could have literally 'broken the bank.'

"As Volcker and Greenspan have both said, the central banks must stand ready to sell gold into the market to prevent its price from rising and displacing the confidence of the markets in the power of the central banks to manage their currency markets."

It looks like gold selling continues this week. Gold is again below $1,200, down $13.

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