The BIS Fires the First Shot

August 31, 2001 – I’ve been waiting for it to happen, and now the war of words has finally begun. The Bank for International Settlements today fired the first shot.

As reported in today’s Financial Times, Giacomo Panizzutti, head of foreign exchange and gold at the Bank for International Settlements, was quoted as saying that he estimated total gold loans to be 5,200 tonnes. As if that weren’t brash enough, he went on to say that the 15 European central banks that signed the 1999 Washington Agreement on gold have “lent 2,119.32 tonnes, which is the amount they had lent at the time of the agreement and a total they pledged not to exceed.”

The article then went on to present Mr. Panizzutti’s analysis of the total amount of gold loans. The somewhat skeptical FT reporter astutely observed: “Analysts find the timing of Mr. Panizzutti’s comments interesting in light of an impending ruling by a Boston court.” Interesting indeed!

That court ruling is of course the one that will come from the hearing scheduled for October 9^th. That day the judge will hear the arguments of the defendants to dismiss the case brought to the federal court by Boston attorney Reg Howe.

It is worthy of note to see that the FT is providing this hearing with worldwide publicity. It is also worth noting the FT rightly acknowledges that the amount of gold loans outstanding is obtaining worldwide attention because of the prodigious efforts by “the Gold Anti-Trust Action Committee (GATA) [which] believes that at least part of gold’s price weakness can be attributed to a conspiracy between the BIS, top officials at the U.S. Treasury Department, the Federal Reserve Bank, and investment houses.”

The FT is generally accepted to be one of the mouthpieces of the cozy cartel of big banks, including those that are defendants in Reg Howe’s case. So I guess it is to be expected that the FT puts GATA in a negative light, focusing on “conspiracy” rather than GATA’s stated aim, which is to use the US federal court system and other legitimate means to get at the truth. But I’m sure that GATA will no doubt welcome this new publicity nonetheless.

More to the point, however, this FT article requires some thoughtful analysis. This analysis is needed in order to put Mr. Panizzutti’s comments in their proper – and unflattering – light.

I know that Reg Howe has gone to great lengths to decline press interviews and other publicity, relying on the principle of fighting his battle in court instead of in the press. Neither Mr. Panizzutti nor the BIS apparently have the same compunction. But even though the FT may willingly give Mr. Panizzutti’s point of view the headlines, a close analysis of this article demonstrates that it was aimed more to put forward BIS propaganda than it was to get at the truth. Consider the following:

1) The article says: “And although the BIS official did not explicitly say as much, the estimate [of gold loans] contradicts conspiracy theories that the official sector has undermined the gold price by pumping more than twice that amount into the market.” That comment sounds fairly authoritative, but it really is just an FT interpretation. It only has the appearances of authority by referring to the “BIS official”. In the interest of open and honest disclosure, however, this statement’s significance was completely undermined by the very next paragraph. The FT noted that “Mr. Panizzutti [was] speaking in his private capacity rather than on behalf of the bank.” If he was speaking in a “private capacity”, why even bother to identify him as a “BIS official” unless to propagandize the supposed authority of his pronouncement? But more importantly, what authority does anybody have when speaking ‘on the record’ just as a private individual? I think everyone knows the answer to that question – none. So regardless of the outward appearances this article conveys, by acknowledging that Mr. Panizzutti is speaking in a private capacity, any alleged facts in this article have to be seriously questioned, clearly establishing that this article’s sole purpose was the propaganda effect it aimed to achieve.

2) That propaganda happens to be the objective is even more apparent in another way, but this time the FT did not have the honesty to provide any disclosure of the facts. The article clearly gives one the impression that Mr. Panizzutti is speaking for the fifteen European central banks (ECB’s) that signed the Washington Agreement. Even aside from the point I made above about the reliability of his information because he is speaking in a personal capacity, Mr. Panizzutti’s remarks have no credibility whatsoever when considering that the BIS was NOT one of the fifteen signatories of the Washington Agreement, an important fact not disclosed by the FT. Therefore, even if he were speaking in his official BIS capacity, the BIS itself has no authority to speak for the fifteen ECB’s nor to speak to the Washington Agreement because it was not a signatory. So is it not even more bizarre for the article to imply authority about the Washington Agreement when in fact there is none? It is clear that the article’s intent is to propagandize the BIS’s own point of view, rather than get at the truth.

3) There is still more evidence of the article’s true intent. How can an individual speaking in his private capacity divulge confidential information about his banking clients? It is obvious that any bank officer who valued his job would not disclose confidential client information unless he was told to do so by his higher-ups. This principle is even more important considering that the BIS is headquartered in Switzerland, a country which respects banking privacy. This is more evidence that the FT’s intent is to propagandize the BIS’s point of view, rather than to present the facts.

4) Mr. Panizzutti’s statements also fall short on their technical merit. He speaks about gold loans, but what about gold deposits? Everybody knows that a deposit into a bank is different from a loan to a bank. The money in your checking account is a deposit, but banks also borrow money. A bank liability for deposits is accounted differently than bank liabilities for money it borrows. The BIS alone has 825 tonnes of gold on deposit according to its most recent annual report (see the explanatory note at the end of this article). That amount by itself is 16% of the total gold loans disclosed by Mr. Panizzutti. How much gold do the central banks have on deposit, in addition to what they have loaned? And what about gold swaps and repos? Why hasn’t Mr. Panizzutti disclosed those totals? The FT article tells only half the story, but lets the uninformed reader think that it is the whole story. By relying on half-truths like this, it is clear that the article was aimed for propaganda, rather than the truth.

If Mr. Panizzutti wanted to truly speak for some ECB, he could make a valuable contribution by telling the whole truth and presenting the whole picture. He could also make a valuable contribution by answering some key questions.

For example, the Bundesbank accounts on its balance sheet for “Gold und Gold Forderungen”, which it translates in the English version of its report as “Gold and Gold Claims”. The word “claims”, according to my Black’s Law Dictionary is “a broad, comprehensive word…to demand as one’s own”. Therefore, it is apparent that ‘claims’ could include different types of Bundesbank assets, specifically, gold ‘claims’ arising from gold loaned by the Bundesbank and gold ‘claims’ arising from gold deposited by the Bundesbank into other banks. And it is therefore logical that this word ‘claims’ also includes the Bundesbank’s gold swaps, and who knows how many other categories of gold transactions that it may have undertaken. Thus, there are four or more types of assets in this one category on the Bundesbank’s balance sheet.

So will Mr. Panizzutti, if he is still inclined to speak for client banks of the BIS, please explain to the FT how much gold the Bundesbank actually has in the vault. Also, how much gold is owed to the Bundesbank in each of these other categories of loans, deposits, swaps and everything else the Bundesbank has done with Germany’s gold.

There is also another question the FT could be asking Mr. Panizzutti. Why isn’t the Bundesbank preparing its financial statements in accordance with generally accepted accounting principles (GAAP)? This question is not just one that relates to full disclosure of transactions in the gold market, but also has a direct bearing on German law.

Section 26(2) of the Bundesbank Act, which governs the preparation of the Bundesbank’s annual statements of account, says: “§26(2) Das Rechnungswesen der Deutschen Bundesbank hat den Grundsätzen ordnungsmäûiger Buchführung zu entsprechen.” The English translation of the Bundesbank Act states this requirement as follows: “§26(2) The accounting system of the Deutsche Bundesbank shall comply with generally accepted accounting principles.”

This requirement for the Bundesbank is very clear, but what is not clear is why the Bundesbank is violating this provision of the law. GAAP states that gold in the Bundesbank’s own vault is different from gold that has been loaned, or gold that has been transferred to others by deposits and other schemes. In other words, gold in the vault is different from ‘claims’ to gold. The European Central Bank itself acknowledges this practice in its October 2000 report, Statistical Treatment of the Eurosystem’s International Reserves, which states: “…reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans)“. In other words, the European Central Bank is acknowledging that the different ECB’s do not distinguish between gold in the vault with gold that is out on “swaps, repos, deposits or loans”.

Yet, in obvious defiance and contravention to GAAP, the Bundesbank reports only one asset, “Gold und Gold Forderungen”, i.e., “Gold and Gold Claims”. Clearly its financial statement does not meet the requirements of Section 26(2) of the Bundesbank Act. Would Mr. Panizzutti please explain why not? Would anyone at the Bundesbank be willing to explain why not?

Readers may recall that the last time the FT mentioned GATA was just before the May 2001 South African Summit sponsored, at great expense, by GATA. And needless to say, that FT article was disparaging of GATA. Given that it appeared just before the GATA Summit, this curious timing to mention an organization that had been in existence for more than two years makes it obvious that the FT was doing the bidding of those who do not want the truth to emerge about the gold market.

I spoke at the Summit. So I know from first-hand knowledge that not only was the Summit well attended by representatives of mining companies, labor unions and African governments, the Summit was also successful in forthrightly communicating GATA’s message. And what is that message? That there is an urgent need for open, honest and full disclosure in the gold market. The FT is apparently afraid of this message, or perhaps, the repercussions of what full disclosure in the gold market would mean to its handlers. So rather than seek facts and full disclosure, it appears that the FT is more intent on doing the bidding of the big banks that pay for the full-page advertisements that appear so regularly and abundantly throughout its ‘pink-sheets’.

So courtesy of the FT, the BIS has come-out swinging, firing the first shot. It has begun a propaganda war. As the FT itself says: “The case is now at a critical stage as the Boston district court prepares its ruling on whether the lawsuit goes to discovery or is thrown out. BIS directors will no doubt be watching with interest to see whether the judge takes Mr. Panizzutti’s comments to heart.” That frank and open admission makes clear the timing as well as the intent of the article, which is for the BIS to propagandize its position, rather than to disclose the truth. But this statement also has an ominous and sinister ring to it.

Are we to believe that a federal court judge is supposed to make his ruling based on what he reads in the FT, assuming he even reads it? Or is this some coded message of intimidation threatening the judge to take “Mr. Panizzutti’s comments to heart” or else? Let’s hope this federal judge is courageous in his willingness to pursue and seek out the truth.