Monetary Gold, SDR's and the BIS

(originally composed October 21, 2009.)

I've been looking a bit more into the gold swaps issue, and seeing as that is a central bank thang, I have, of course, found myself today wasting another otherwise good day patrolling the Bank for International Settlements' website (www.bis.org). I am quite used to gasping for air as I word-search various documents in the voluminous records at the BIS, and I have to say everything was going just fine--just fine, that is, until I ended up snuggled between gold, SDR's, and the IMF.

Let me start slow. Specifically, I have recently embarked upon reviewing the BIS IFC's (Irving Fisher Committee on Central Bank Statistics) new 2009 document titled, "Measuring Financial Innovation and its Impact" (warning, pdf, 538 pgs). This multi-author, multi-section report goes into great detail about a lot of things, from the derivatives disaster to the housing market in Netherlands, but the reason I was looking at it was to find one section in particular. The section starts on pg 58, "Integration of new financial developments into the new worldwide statistical standards," by Reimind Mink.

As the title suggests, this report considers the challenges that have recently developed due to "liberalisation" of the financial regulatory scheme, globalization, and securitization, and discusses options for how to integrate all the different national systems used by various countries throughout the world to determine a more "uniform" idea of what's an "asset" and what's a "liability." I was mildly surprised to see that the BIS even cared about making such a distinction, but I digress. From the report, the first table is a depressing set of data on issued debt securities, and it goes on to analyze how an "asset" or "liability" should be reported to conform with ever-changing globalization "standards" originally set forth in the System of National Account standards (SNA), which are now giving way to the new International Financial Reporting Standards (IFRS). It’s actually a very interesting read, because there is a frank (if accidental!) presentation of the lunacy of the debt/securitization scheme and resulting derivatives, and risk transfer is discussed at length. But that's not why I mention it: I mention it because it talks about gold. "Monetary gold," to be exact. There are a few references to it, and the last one is most critical.

But to go in order, here's the first one: gold swaps, loans and deposits. While "reviewing the categories of financial assets and liabilities," Mink states the following, on the subject:

The accounting of repurchase agreements has been under discussion for some years. However, there is still insufficient agreement on how to improve the recording of repos. Nevertheless, some detailed changes have been included, for example that “on-selling is common” and that, in this case, a negative asset is recorded for the lender to avoid double-counting. Furthermore, repos should be covered in terms of a cash collateral as well as in terms of a security collateral, which also includes gold swaps, loans and deposits.

This is interesting: "...cash collateral as well as in terms of a security collateral," indicating the use of gold swaps, loans, deposits to prevent the "double-counting." Wow, that's almost sounds like it used to be! Imagine, actually being prohibited from lending the same "asset" to two different entities at the same time! The GATA/Fed gold swap issue suddenly takes on yet more significance. The August 7 2009 "Central Bank Statement on Gold" from the latest CB/IMF discussions over the sale of the gold states that "Gold remains an important element of monetary reserves," and of course much of that importance is with gold swaps. Even more important would be the gold loans, which often quickly spirals into that wild world of gold leasing. But the mention of gold as a "security collateral" is worth noting.

And Mink's next mention of gold is yet more interesting. It comes on pg 78, table 8. This table lists "financial assets/liabilities," declares what "issues" each might have in regards to the reporting standards, and finally specifies the "embedding" that compromises/jeopardizes each: is the asset/liability subject to "money," to "household/corporate debt," to "government debt," to "credit"?

Of the two dozen or so listed "assets/liabilities," there are only two listed as having zero "embeddings:" SDR's and gold. This is interesting. Now, at first glance I thought that this was not accurate, since the IMF Special Drawing Rights should be embedded to government debt/IMF members’ balance sheets, right? Nope--because then I remembered something from my past research: the SDR's are backed by something as good as gold--the BIS.

As you may remember, the official currency unit of the Bank for International Settlements itself is the SDR. The BIS, of course, and its member central banks and private individuals/corporations (until they were bought out in 2001) is the father of the IMF, so I guess I should technically stop called the SDR what I usually call it, which is "that little bastard fiat punk!" In seriousness though, the BIS also holds "Investment Accounts" or IA's for the IMF since 2005. These are international loans and investments that the IMF pays the BIS to run. The SDR itself took the position as official unit of the BIS from no other than the gold* Swiss franc in 2003 (*more on that shortly). As we know, the SDR's are "a potential claim on the freely usable currencies of IMF members"--55 of which are subject to the central banks that own the BIS.

Also as you know, the IMF just boosted the SDR base on Sept 9--yeah, boosted it by almost ten times! Straight from the IMF, the allotted/available SDR base went from 21.4 Billion to 204 Billion. Check out this table from the IMF. The leftmost column is what Fund members had before, including many with "0." The rightmost column is the current post-Sept 9 allocation. The US went from 4.9 Billion to 35.3 Billion, and there are now zero countries without SDR's (of the 186 member countries).

What's more interesting than that IMF SDR allocation table, though, is the BIS' own balance sheet. The BIS already in August--before the 10x allocation--held SDR 252.9 Billion in deposits/assets, with SDR 238.3 Billion in liabilities/accounts payable. Here's the August 2009 BIS Balance Sheet. Let me run that by you again: the IMF "increased" the SDR supply from 21.4 Billion to 204 Billion in September, but in August, the BIS had SDR 253 Billion on its balance sheet. How the hell does that work?!

This is how it works: the BIS is creating up SDR's. The BIS is taking national currency deposits from the 55 member/owner central banks and converting them to SDR's on its own balance sheet. The SDR's are "claims on the freely usable currencies of IMF members," therefore, the deposits of the central banks become claims on those currencies--the deposits of the fiat central banks who can deposit as much as they feel at the BIS in whatever currency the chose--including the SDR's allotted to their "nation," as the central banks are the sole depositories for the national wealth/sellers of the national debt. The BIS is then paying out dividends to these same member CB's in the form of SDR's, which again can be used to claim currencies. By August 2009, they had just made up out of thin air almost twelve times the supposed global supply of SDR’s. They are truly acting like the "central bank of the world," complete with printing!

This would not be possible for any other currency: what happened in Zimbabwe when Mugabe created up trillions of Zimbabwe dollars to buy up foreign currency to pay off the IMF loans? It destroyed the Zimbabwe dollar, because he had to keep printing and printing, because the value of the Z$ went lower and lower, and no one would sell him their valuable foreign currencies for worthless Z$. Yet, the BIS had a "claim" on its balance sheet in August to an amount of over ten times the total available SDR's that the IMF had allocated to date. Why can the BIS pull this nonsense off--claiming more of a currency than exists of it--but Mugabe can't? Is this not like the idea that $1.5 Quadrillion "dollars" of derivatives "exists" when there aren't even $1.5 quadrillion dollars on the planet? Well, yes (actual, factual, logical), and no (bankster rules!): the important part, according to the BIS is that "no" part, and here's their perfect exemption, straight from the IMF's explanation of SDR's:

"Various Fund members and one prescribed SDR holder have agreed to stand ready to buy and sell SDR’s on a voluntary basis."

Guess who's the one prescribed SDR holder? You got it--the BIS. Oh, thank goodness they are "standing ready" to help/oppress us all. Since the official unit of the BIS is the SDR, the BIS has the inside lane, because they are the "one prescribed" buyer/seller through which SDR's can be procured when no Fund member nation wants to sell--because they can create it! What other reason would the BIS move to SDR's? Besides that huge one, I'm sure there are many others, but I can also say that about a year and half before they ousted the "gold" Swiss franc in 2003, the Swiss government divorced the currency from its marginal (40%) gold backing, and by 2005 the CHF was totally fiat. The SDR, on the other hand, is the official currency unit of the single largest supranational holder of gold on the planet, and the third largest holder of gold period -- the IMF (which holds 3,217 metric tonnes of gold; I say "suprantional" because other nations have more, but no other bank/institution has gold anywhere near the IMF's holding, which is not subject to repatriation to the Fund members who contributed it in the first place). Talk about hedging. While the IMF states that holders of SDR's have no entitlement to the gold held by the Fund, they aren't fooling me: the BIS owns the Fund. Add to that the fact that holders of SDR's receive weekly interest payments from the IMF, and there's two good reasons. What's a "central bank for central banks" to do?

I found this currency converter that changes SDR's to gold in oz. Today, Oct 18 2009, SDR 1 buys .002 oz gold, or to flip it, 1 oz gold buys SDR 658.51. According to the IMF, when introduced to support the Bretton Woods system in 1969, "the value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar." Now, that 0.888671 grams (converts to gold in ounces as 0.0285 oz, there's 31.1 gm/oz) buys SDR 18.77. Or, that same 1969 SDR/USD "$1" worth of gold, 0.888671 grams, costs exactly US$30 (pricing gold at $1050). The IMF still prices the 3,217 tonnes (103.4 million oz) of gold on their books as $42.22/oz for accounting purposes, but then converts the actual profits from auctions (400 tonnes of which are forthcoming/happened recently) to SDR's. The IMF accepts some currencies as payment for the quotas due from the Fund members, and that is held on their balance sheet as SDR's, because the IMF only loans out in SDR's. This, as you know, is why its so impossible for so many countries to repay the IMF loans in SDR's, because they have to purchases them back, and pledge their natural resources/labor/national sovereignty as collateral, which are more than happily scooped up by the wealthy Fund members (like EU members, the US, the UK), who never take the SDR loans in the first place, when the countries default. While the SDR holders are earning interest on their SDR's, those under loans are paying interest on the loan and incurring negative charges if they fall under their required quota for holdings of SDR's--of which they have zero, because they have to pay the IMF in SDR's! Totally criminal. Pure fraud.

The Federal Reserve reports SDR's on the balance sheet (as well as "monetary gold"). But something about the US' agreement concerning SDR's can be learned from the following explanation by the Federal Reserve Bank of Chicago, in an endnote on their balance sheet states:

"SDR certificates are issued by the International Monetary Fund (the "Fund") to its members in proportion to each member's quota in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates somewhat like gold certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks based upon each Reserve Bank's Federal Reserve notes outstanding at the end of the preceding year. There were no SDR transactions in 2008 or 2007."

I can't wait to see if there are some SDR transactions to report in 2009. That the Treasury is authorized to issue SDR's is nothing special, as the FRS is the central bank of the US, and therefore is rather quite "entitled" to them, along with the interest payments. This same balance sheet from the FRB Chicago indicates that that bank held $913 million in US gold certificates, which are still pegged at $42.22 an ounce. (Isn't it great to think that the FRS can still get gold certificates from the Treasury, but we can't?) Here's the rest on gold from that same balance sheet:

"Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank."

From this FRS "Factors Affecting Reserve Balances" (March 19 2009), if you'll see the FRS 12 banks together claim $11,037 million in gold certificates, with the FRBNY holding the most at $3,935 million. At $42.22 an once, with $11.037 Billion in outstanding gold certificates that "are required to be backed by the gold of the US Treasury," then the US Treasury needs 261,416,390 ounces, or 8130.95 tonnes (converter). So, the Treasury should have it, right? Weeell.....

They don't. The last "audit" of the deep-storage gold (and silver) holdings of the US Treasury was done in Sept 2007. I say "audit" because the count was made by "test" method, meaning not every ounce of metal was actually counted. Here's the report: you can see yourself that the holdings are 245,262,897 oz, with a statutory value ($42.22/oz) of $10,355,539,091. Whoops. That's not the $11,037,000,000 that the FRS states on the Reserve Balances sheet, is it? (I double-checked, and the March 2007 FRS sheet also lists that $11.037 billion in gold certificates amount). Hmm.

But getting back to the BIS document, "Integration of new financial developments into the new worldwide statistical standards," there is one last mention of gold worth noting. It is again in a table of assets/liabilities, and it is table 8, pg 78. This table lists various investment instruments on one side and their status under the new IFRS on the other. Again at the very top are listed Gold and SDR's. The only item on the whole list labeled as an "unembedded" "tangible asset" is gold. SDR's are (rightly) listed as "debt instruments." The rest of the table is more debt instruments, equity instruments, loans and receivables, warrants, stock options--but no other unencumbered, tangible assets. (And by the way, "tangible" in CB circles doesn't mean "I can touch it," although with gold, that is of course true as well.) Like many have said, gold is one asset that is not someone else's liability.

I think there is a lot going on here. There are some serious moves being made with the SDR thing, and how gold plays into that is unknown to me. I'll complete this little report with an important explanation as to why Mink was even writing about the asset allocations in the first place. The BIS document was released on the site in June 2009, but it was completed in 2008. Mink is discussing in his essay on the new IFRS/NSA standards, with their new subcategories for reporting...

Those new, never before seen categories for asset/liability reporting are: monetary gold and SDR's (pg 469).

Well, I'll be.