ANALYSIS-Gold loan curbs threaten miners, funds
biz.yahoo.com
The European central banks that pledged curbs on gold lending at the weekend have set off a surge in bullion lease rates that threatens miners and speculators alike, dealers and analysts said on Wednesday.
Lease rates snapped out to 10 percent for one-month loans on Wednesday, from 0.5 percent earlier this year.
The rise meant borrowing gold was now some five percentage points more costly than borrowing dollars. Usually the difference is four points in gold's favour, and the shift is now jeopardising the positions of short sold investment funds and heavily hedged gold miners.
''This is really one of the most unhappy times for the market I have ever seen,'' Jessica Cross of Virtual Metals Research and Consulting told Reuters.
Gold began to rise after heavy bidding at the UK gold auction on September 21, then took off following Sunday's unexpected pledge by the European central banks to limit annual sales to 400 tonnes for the next five years, including those already flagged by Britain and Switzerland.
The 15 banks involved -- the European Central Bank, the 11 national central banks in the euro zone, plus the Swedish, Swiss and British central banks -- also agreed to limit their gold leasing and use of gold futures and options to current levels.
These banks are responsible for perhaps half the reserve gold lent to the bullion market.
NEW MARKET ENVIRONMENT
While the sales curb buoyed the market, the controls on derivatives activity sent a tremor through the board rooms of mining firms, funds, and their bullion bank counterparties.
Gold lease rates had already been moving higher in recent months as miners booked fresh price hedges in response to news of Britain's planned gold sales and amid fears of possible end-of-year disruption caused by the 2000 date change.
The market calculates lease rates using the underlying gold swap rate, the key indicator for how much gold is available for lending and the driver for pricing mechanisms in all the bullion market's main derivative products.
Kevin Crisp, treasury analyst at bankers JP Morgan, said bullion derivatives -- which include over-the-counter gold loans, forward sales, futures and options -- developed during a decade of abundant liquidity and sliding spot prices.
''This market evolved in a falling price environment. We have not stress-tested how this works with a rising price,'' he said.
"There are very few people who have lived through such volatile trading conditions in the gold market. It's hard to get your mind round the changes.
''No one knows how big or complex this market is.''
Producers have grown used to selling yet-to-be-mined metal at a generous forward premium, borrowing gold to sell, depositing the proceeds at higher yields and waiting to dig out the metal to repay loans.
Of the hedging miners, many booked deals using rolling lease rate contracts, allowing them to benefit from the changing premium between the price of borrowing gold and borrowing money, a tactic rendered highly dangerous by this week's hike in rates.
''I am very concerned that we are going to see some casualties,'' said Virtual Metal's Cross.
''It would be ironic if producers had to go back to the central banks to ask for more liquidity,'' she said, adding that miners had erred in calling for central banks to limit lending.
''It shows a very poor understanding of the market. I don't think anyone fully appreciated the effects,'' she added.
SHORT FUNDS ALSO PRESSURED
Investment funds have also profited from bullion derivatives markets via so-called gold carry trades, borrowing cheap metal to sell, banking the proceeds in interest-bearing dollars or yen, then buying back spot or rolling the position over when the loan expired.
That was the kind of speculative short selling that the central bank agreement was meant to curb, analysts said.
Bullion dealers said funds scrambling to cover such positions had fuelled much of gold's rise since September 21, the day Britain sold 25 tonnes of gold for $255.75 an ounce at an auction that was eight times oversubscribed.
Position unwinding by funds short of gold and long on bonds was already evident in Tuesday's U.S. bonds markets, Chase Manhattan Bank said in a morning note on Wednesday. |
