Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are Central, Commercial Banks Lending or Selling Gold?

Commodities / Gold and Silver 2011 Dec 12, 2011 - 10:35 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe big feature of last week's decline in the gold price has been the lending of gold into the market. Commercial banks could have been doing it, but there is evidence in the past that central banks have leased gold to cap the gold price and bring it down. The gold price declines were so rapid and extensive that some investors theorized that central banks, including the Federal Reserve, were actively selling gold. The talk is that Commercial banks were unable to get the dollar liquidity they needed, leasing gold under their wings to facilitate these loans at lower interest rates. After the massive swap arrangements made between the U.S. Fed and the E.C.B., many felt that the problems of dollar liquidity had been overcome; however, by the extensive leasing of gold, this does not appear true.


Last year, we saw over 500 tonnes of gold for dollar swaps instituted by the Bank for International Settlements, then reversed as the swaps were completed. In light of central bank and Commercial bank lack of transparency on their gold dealings, the possibilities are worth contemplating by gold investors, because we must discern whether we're seeing distress selling as banks flail for survival, or if European central banks are attempting to hold back the gold price to stop it highlighting the parlous state of the world's leading currencies. We now speculate...

If gold is being leased, how can it make the gold price fall?

How could such lending result in the gold price falling? After all, the gold must at some point be returned to the lessor. What happens when gold is leased is that a Central, Bullion, or Commercial bank will loan gold to an entity that would sell that gold into the market for dollars.

Gold Leasing from 1985

This happened on a grand scale after 1985 when a host of central banks loaned gold primarily to gold producers -who would finance future gold production with the dollar proceeds ensuring they would have the gold to return to the lessors--knowing that their gold would be sold and knowing they would ensure that gold supplies to the open market would knock the gold price down from $850 to much lower levels. They were successful in these moves, taking the gold price to around $275.

But today, only a very small amount of gold production is financed this way. The easily mined, large gold deposits were fully developed last century, leaving only smaller deposits available for mining. These cannot suddenly be turned on, so gold borrowers are few and far between in the in the mining industry. Therefore, who would want to borrow gold? Would gold manufacturers?

Unlikely, because they would want to sell the gold and not return it. So whoever borrowed the gold outside gold producers would have a position: long dollars and short gold. Only someone who knew the gold price would fall (they would need facts to convince them that this was a low risk situation) or they would face a high risk, when it came to returning the gold. If the gold price rose they would find themselves in the same position as the gold producers were in when the gold price turned back up. When gold producers saw the gold price stop falling and turn back up, they were caught 'short'. So many gold producers eventually lost on their "hedged" positions. In fact, around 3,000 tonnes of gold was "de-hedged" over time, and there are only small hedged positions left in the market. What they believed was a prudent situation, the gold executives found, was a 'short' position in a rising market -the worst position company directors, handling shareholder's funds, could be in.

The big difference from now on is that there are few gold producers that would entertain borrowing gold today, no matter how cheap it could be. So who would want to go long of dollars and short of gold in these markets with prices moving fast and furiously both ways to the extent that interest rate differentials become insignificant?

Who is Leasing?

It could be European central banks, particularly if they knew for sure they would eventually get their gold back (as we mentioned earlier, provided swap arrangements for major banks). Within the year, the swaps were unwound. The banks knew the B.I.S. would not sell gold and hope to buy it back at the end of the swap, so a swap arrangement such as these would not carry a price risk because the Bank of International Settlements would not have 'played the market' but simply held the gold until the swap matured.

Some may say that it was gold lending by European commercial banks, but who would borrow from them just for the interest differential, while carrying the risk of price movements? Yes, it's true that the persistently negative gold lease rates provide an opportunity, but what a gamble with gold prices moving 3% with ease, in just a day. Yes, gold leases are at their lowest levels since 1998, but is this really sufficient an incentive?

Is gold being sold by Central Banks?

Market News International reported that the Bank for International Settlements, the Bank of England, and the Federal Reserve have been "good sellers of gold." There have not been any official denials of official selling.

Could it in fact be the Fed? Unlike most central banks, the Fed does not have access to U.S. gold reserves, which are held by the Treasury and can be sold only on the instructions of the Treasury secretary.

Could it be European central banks? They have a 'Central Bank Gold Agreement' in place with an annual 'ceiling' of 400 tonnes, so they have the ability to do so. The problem is that the E.C.B. publishes, on a weekly basis, the amount of gold sold within the Eurosystem. The only amount sold in the last year has been under 10 tonnes and primarily for coin production. So unless it has been sold in the last week, we would know. No meaningful sales have taken place in the last year from Eurosystem banks.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in