Gold Market Manipulation Coming Unravelled

By Adrian Douglas

The Financial Times published an article on July 29 headlined “BIS Gold Swaps Mystery Is Unravelled” in an attempt to put the record straight about the recently discovered gold swaps the BIS had entered into with European commercial banks.

I recently published my interpretation of these gold swaps and concluded that it is most likely a secret bail-out of one or more bullion banks that do not have enough physical gold to meet burgeoning demand.

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


““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 the BIS earning a little return on 14 billion dollars.

The Financial Times has learnt 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.

And GATA has learned that the moon is made of Swiss cheese! In Central Banking 14 billion dollars is chump change. The US Treasury auctions between 70 to 130 billion dollars of Treasury Debt very other week. Only a few weeks ago the ECB created one trillion dollars out of thin air to defend the euro in the wake of 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 dollars as opposed to the 346 tonnes of gold that make it the biggest gold swap in history.

The BIS has given us another piece of information

“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”

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, who along with JPMorganChase hold 95% of all gold and precious metals derivative positions among US commercial banks as reported to the US Treasury Department. HSBC along with JPMorganChase are also holding a massive short position in gold and silver on the Comex. Furthermore HSBC is the custodian of the gold that is supposedly backing the GLD Exchange Traded Fund.

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 real physical bullion in exchange for 14 billion dollars. I further postulated that the bullion bank made another swap with the BIS whereupon the BIS gave them 14 billion dollars but the bullion bank did not hand over the real physical 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 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 and that central banks were a source for the real physical gold. But the real physical gold wasn’t the “gold” that the BIS received as a swap for 14 billion dollars. 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 the vault the bullion banks have loaned or sold 45 ounces. So this appears to confirm my thesis that the BIS has been credited 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 (LBMA) in their description of “unallocated account” holders.

The FT story suggests at least 10 bullion banks needed physical gold bullion desperately. This looks like a rerun of the 1960’s 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/oz.

I have spelled out in recent articles that there is a run on the bullion banks that has commenced and is gaining momentum. Investors and institutions are waking up to the fact that “unallocated gold” is not gold at all but just an unsecured promise for gold. They are now starting to demand delivery and as there is only one 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 has explained the “physical” gold market is in fact a misnomer and it is actually a paper market backed by only a small amount of physical gold.

So investors have bought a record amount of “physical gold” which is actually paper gold which they have never seen and only about 2.3% 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 too 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 IMF has been surreptitiously selling gold at a clip of around 15 tonnes per month every 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 one real 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 only one that is in the vault the price explosion is beyond imagination.

What is becoming unraveled is not the mystery of the BIS gold swaps as claimed by the FT but the gold price manipulation scheme itself.

Adrian Douglas
Editor of Market Force Analysis
Board Member of GATA

July 30, 2010
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