It has now…

…turned out that  Philip Klapwijk of GFMS had exactly the right idea – European banks have used unallocated gold belonging to their customers to finance themselves cheaply, and they apparently did that just ahead of the 'stress test' farce – perhaps in order to make themselves look  more financially sound than they really are. Most likely though it was the problems these banks encountered in obtaining dollar funding in the interbank lending market that occasioned the transaction. Of course that is not the official story – officially, it was the BIS initiating the swaps in order to 'earn a return on its huge dollar holdings'. That 'explanation' is of course completely absurd.


As the FT reports today, under the title "BIS gold swaps mystery is unraveled" (well hidden away on page 18):


"Three big banks – HSBC, Société Générale 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." The Financial Times 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 US dollar-denominated holdings. The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits they were taking from the Basel-based institution"

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.”

Nonetheless, two central bank officials said some of the commercial banks also needed the US dollar funding and were keen to act as a counterparty with the BIS. The gold swaps began in December and surged in January, when the Greek debt crisis erupted and European commercial banks were facing funding problems.

Jaime Caruana, head of the BIS, told the FT the swaps were “regular commercial activities” for the bank."


Yes, it's all 'perfectly normal' and it sure was 'mutually beneficial' – except for the fact that what was used was apparently mostly unallocated gold the banks concerned held in deposits for their customers.

As the FT further explains:


“The gold swaps were, in effect, a form of collateral against the US-dollar deposits placed by the BIS with commercial banks. Gold is widely regarded as one of the safest assets, but has not been widely used as collateral in the past. Mr Caruana described the transactions as “loans with a guarantee”. 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.”


Yep, gold deposits belonging to the banks' customers – this is a form of fractionally reserved gold banking in other words, where the banks use assets that belong to their customers for their own profit. And this is legal why exactly? We know of course that it is 'legal' de iure, we merely note that this privilege enjoyed by the banks flies in the face of every common sense interpretation of property rights.

Just in case people have not really understood the implications at that point, the FT makes them  unambiguously clear in the next paragraph:


“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. Officials said other commercial banks obtained the gold from the lending market, borrowing bullion from emerging countries’ central banks.


There you have it. As we said before, if you have gold in an 'unallocated account' , be aware that the bank can do with it whatever it likes. Your gold is often simply not 'there'. What there is instead, is a piece of paper that 'represents' your gold. Many gold depositors probably know this, if they have bothered to read the fine print – but many may not be aware of it, and simply have opted for unallocated accounts because they are cheaper than allocated ones. It seems unlikely that the banks pay their gold depositors one red cent for the privilege of doing whatever they want with their gold – but in all likelihood they continue to charge storage fees for it, whether it is or isn't physically present.

As we remarked before, this completely defeats the purpose of gold ownership – after all, people inter alia buy gold precisely because they want to be insured against a potential systemic collapse. A 'gold receivable' with your gold used as collateral in the bank's own name insures you against nothing at all.




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2 Responses to “BIS Gold Swaps Update – the ‘Mystery’ is lifted”

  • TiaCruz24:

    It’s understandable that money can make people disembarrass. But what to do if somebody doesn’t have money? The one way only is to try to get the home loans and small business loan.

  • Bearster:

    I agree that unallocated accounts will end in tears and grief.

    That said, unallocated accounts are a credit relationship. I don’t think credit itself should be criminalizes but rather we should not have adopted a regime of irredeemable credit based fiat currency. Austrians understand that this necessarily causes distortions, malinvestment, and busts. But the sheer magnitude of the worldwide dislocations and perverse results are hard to really picture!

    As Professor Fekete points out, this is one reason why we need a gold monetary system: because it gives wealth holders a choice to save if they like the risk to interest rate ratio on offer, vs. to hoard their gold off the grid if try don’t.

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