Big Fall in Central Bank Gold Lending—GFMS


"Focusing specifically on the 2Q09, GFMS expects central bank lending will continue to contract."

According to GFMS data, lending by central banks and other official institutions peaked at over 4,600 tons in 2000. By the end of 2008, the figure had dropped to just under 1,900 tons, with a further fall of nearly 600 tons during the course of last year.

Moreover, the first half of 2009 has reportedly seen another sizeable reduction in lending. The bulk of this decline can be explained by the slide in gold leasing rates over much of the current decade.

From 1998-2001, 3-month leasing rates averaged around 1.4%, whereas from 2002-2008 the comparable average slumped to less than 0.3%. In addition, since the start of the credit crisis, lenders have become increasingly focused on the safety of their gold deposits with commercial banks.

These concerns over counterparty credit risks became even greater in the wake of the failure of Lehman Brothers last September. As a result, many central banks decided to cut the number of institutions they were prepared to deal with and required high-quality collateral against even short-term loans.

These developments have together resulted in a much less smoothly functioning lending market and to a re-pricing of liquidity, something to some extent seen in the jump in leasing rates during the latter part of 2008.

Even though leasing rates this year have dropped back considerably, we do not believe that this is due to the generally greater risk appetite seen in recent months; this has yet to impact central banks' willingness to lend out their gold.

Focusing specifically on the 2Q09, GFMS expects central bank lending will continue to contract. Whether this will be at a somewhat slower pace than what was seen last year and the first half of this year, is hard to tell.

The improving health of commercial banks should eventually lead to some greater willingness to lend on the part of central banks. On the other, published leasing rates have dropped back to very unattractive levels.

Nevertheless, we are doubtful that any major jump in rates can be sustained unless and until borrowing demand picks up considerably, something that looks improbable over at least the next six months.

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