Central Bank Gold Lending - A Market Distorter
Source: Mineweb (10/23/08)
Jeff Nichols of American Precious Metals Advisors feels the recent breakdown in the price of gold has been much more a reflection of stepped up Central Bank lending of gold, and much less a result of actual Central Bank gold sales or liquidation of long futures positions by hedge funds and other large-scale speculators, both of which seem to have grabbed all of the credit among gold analysts and the financial press.
Because of the interest raised, Nichols has extrapolated on this in a new Gold Briefing. He comments that "Central Banks, eager to earn a small return on their official reserve holdings, have long been lenders of gold. However, the ownership of gold lent to (or on deposit with) bullion banks remains with the Central Bank lender. Thus, gold-lending activities are off the books and gold lent continues to be counted by the lender as official monetary reserves. Hence, there is no statistical reporting by any of the central banks engaged in gold lending - and analysts are, like Sherlock Holmes, left to deduce this important piece of the gold-market puzzle."
It is Nichols' firm conviction that gold loans to bullion banks in recent weeks and months have been an off-balance sheet tool utilized by some central banks to augment their efforts to provide liquidity to the banking system -- since gold lent (placed on deposit) is sold for cash and typically reinvested in U.S. Treasury bills or other securities by the bullion bank/gold dealer...