Gold Bullion Reserve lending by central banks has “almost completely stopped”

October 8, 2008 by · 1 Comment
Filed under: Commodities News 

This is a sign of the financial community is reigning in all good assets and preparing for the coming storm which most media outlets and analyst are finally acknowledging.  I am still surprised that central banks actually lease gold and we let that show on both balance sheets when in reality it only exists in one physical location.  In the article, they mention that they are worried that banks will not be able to fulfill their bullion lease terms and this is why central banks are not leasing to any banks.   I am watching a gentlemen (Mr. Blanchard) from the International Monetary Fund (IMF) stating that we will not see any turn around til mid-2009.  He even made sure to state that this was based on current estimates which in my opinion are still far too optimistic.  He said industrial countries will see zero or negative growth and emerging markets will have limited growth.

News Piece:

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 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.

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One Response to “Gold Bullion Reserve lending by central banks has “almost completely stopped””
  1. drake funes says:

    Banks have been for centuries the hidden hand behind governments and monarchs, the question we should ask ourselves is, how did banks extract so much power and influence over entire nations through out history and from the well researched answers of which we seek, we must begin to formulate solid strategies to remove our dependence upon banks
    quickly as history has shown us that they do not serve humanities interest

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