CBs Stop Lending Bullion

Central Banks All But Stop Lending Bullion

By Javier Blas, Ft.com In London | 7 October 2008

Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level. The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.

Gold lease rates for two, three and six months and for a year also jumped to levels not seen in the last seven years. Traders said the jump reflects the fact that central banks— mostly European— have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not be able to repay their bullion loans if they are engulfed by the financial crisis.

"A number of central banks have been cutting back on their gold lending," said Tom Kendall, a precious metals strategist at Mitsubishi in London. John Reade, a commodities strategist at UBS, added that there had been a lot of talk about some central banks being unwilling to lend their gold because of a redoubled focus on the risk of borrowers not returning it. "There is very little appetite for unsecured lending at the moment," he said.

Central banks usually do not ask borrowers to post any guarantee— or collateral— to secure bullion loans. "The key word now is safety," an official from a Europe-based central bank said. In normal circumstances, central banks lend gold into the market— providing key liquidity— to earn a small return on what otherwise is a non-yielding asset. Other factors are also pushing lease rates higher, including more investors’ positions no longer available for lending, according to Philipp Klapwijk, chairman of GFMS, the London-based precious metals consultants.

Traders said the general dysfunction in money markets, with US dollar rates significantly higher, was contributing to volatile gold lease rates. Demand for physical gold and small and medium-sized bars had been strong, removing supplies from the market that otherwise could have been lent, traders added. The US Mint onTuesday said it had run out of half-ounce and quarter-ounce American Eagle gold coins following "unprecedented" demand.

Gold prices on Tuesday rose $19.3 to $880.6 a troy ounce, having hit an intraday high of $890.6 an ounce. Bullion prices hit an all-time high of $1,030.8 in March. In euro terms, gold prices rose on Tuesday to a record high of €654.22 an ounce, above March’s all-time high of €651.24 an ounce. It also hit a record in Australian dollars. Investors are seeking refuge in actual gold coins and bars as fears about the safety of their savings increase. Some have even been selling their positions in gold futures, as this is a less tangible form of the metal. Since the collapse of Lehman Brothers three weeks ago, bullion prices have risen about 20 per cent.

Copyright The Financial Times Limited 2008


Demand Weakness Hurts Gold

By Javier Blas | 13 August 2008

Two pillars have supported the boom in gold prices in recent years: strong demand and lacklustre supply. The latter remains a robust buttress, but the foundations of the former are cracking under the weight of record prices. In the second quarter, gold consumption fell to 735.6 tonnes, down 19 per cent against the same period last year, led by a 24 per cent drop in jewelry demand, the industry-backed World Gold Council said on Wednesday. That drop in consumption deepens a fall of 18 per cent in the first half of this year compared to the equivalent period last year.

The large contraction, analysts said, darkens the previously bright outlook for bullion. It also helps explain why gold prices, after hitting a record high of $1,030.80 an ounce in March, have fallen back to just above $800. But the cracks in the demand pillar do not mean that gold prices are about to collapse to the $250 an ounce low of 1999, nor that a correction to $600 an ounce— the level of January 2007— is in the cards, analysts said.

Suki Cooper, a precious metals analyst at Barclays Capital, said gold prices were more likely to trade between $800— $900 for the rest of this year and 2009. Nevertheless, some investors have taken notice of the change in gold’s fortunes and are liquidating their positions. "The speculative element is coming off," said Jill Leyland, economic advisor at the WGC in London.

The sudden resurgence of the dollar, and calming of fears about inflation have added to the selling. Indeed, the exit of speculative money can be seen in the bullion holdings of the world’s largest gold exchange traded fund— the New York-listed SPDR Gold Shares— which fell on Tuesday to 659.03 tonnes, down 6.6 per cent from a peak of 705.9 tonnes last month.

One particular concern among investors is the plunge in gold demand in India, by far the world’s largest consumer of gold. Between April and June, jewelry and investment demand fell there by 45 per cent. Demand also fell in Turkey and the Middle East, but held in China and rose strongly in Vietnam. The WGC said in its quarterly Gold Demands Trends report that the primary factor driving consumption lower was the continued strength in the gold price and volatility.

"Deteriorating conditions across many economies . . . acted as a further barrier to spending on gold jewelery," it added, pointing to large falls in US, UK and Italian jewelery demand, particularly in the middle and lower end of the market. However, Dave Russell, of Gold Investments in Dublin, said that the recent fall in gold prices has triggered renewed interest in bullion, with evidence of retail investment picking up. Other analysts said that consumption in India was also showing a rebound.

Investors, in any case, can count for the time being on the support of the supply pillar. In the second quarter, gold output increased just 1 per cent compared with the same period of a year ago, and the advance was only possible because a large amount of old gold returned to the market in the form of scrap. Indeed, mined gold— the main source of supply— fell 4 per cent in the quarter, with increases in Russia and China unable to offset falls in Indonesia, South Africa and Australia. Nevertheless, mined output could increase in the future as miners exhaust the buy-back of old price hedges, which until now have restrained production.

For that reason, the main risk for investors— although it does not appear imminent— is the emergence of a fissure in the supply pillar, just as the demand column continues to fracture.

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Normxxx    
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