Gold -- 297.60 -- 298.10
The Bundesbank announcement did little to the price today.
However the drawback from 300 recently could have been from the higher level pre-announcement understandings with clients of the bank. At that level, the congnoscenti know what is up with future moves. The large scale buyers and sellers were not caught by surprise. As well, they probably know that this "sale" is just covering the short in a buy-back. In other words, the sale has been made, the bank just acknowledges it, by closing the loan of the gold and taking cash instead. They may be doing this at a much lower price than the original loaned price. Or at least it may be covered for their borrowers by derivatives, such as put options.
Let's work this through. A borrower of gold from the bank makes a contract with a producer to buy his gold forward or to loan him, the miner, a sum of say, 330 dollars per ounce, perhaps 10% or more over the present price, to take delivery manana, in gold.
In order to finance this loan to the miner, he borrows excess gold from a bank at perhaps 1% to 2% interest, and sells it immediately. In order to return the gold to the bank, he can wait for the gold to be returned by the miner, or he can buy gold later, if the price goes down. How does he ensure this latter strategy? He may buy a "put" for that many ounces at the price now, in order to be assured that he can sell gold later at a higher price and deliver the cash, or buy gold at a future, perhaps lower, price on a bet. He buys a call also at that price for that many ounces, in case the price rises. He is fully hedged for price moves and he has gold coming in from the miner, so his loan is safe.
If the price rises, he has the miner's gold coming in, which he will sell in case he has to pay the bank its gold or the money for it, and he has the call, which he can exercise at the lower price, to pocket the differential. Never mind returning the loan to the bank at this time, keep paying the low interest and making money, we say.
But the borrower of gold, KNOWS the price is going down. He and other borrowers have sold TWICE the gold that is being produced. Gold has nowhere else to go. So he sells hedged calls and buys puts, and shorts gold in general, confident that when he returns the gold to the bank, it will be for a huge profit. He can always buy back in at lower prices. But he NEVER returns the gold! All he does is pay the miniscule interest on the gold, by borrowing surplus, and he buys T-Bills or other guaranteed investment to offset the interest on the gold. If T-Bills pay 6% and gold costs 1%, then he only has to buy one dollar in gold financed T-Bills to every 6 dollars in gold he borrows to break even. (You have to borrow 20% more to buy T-bills than your total cash payout needs) So if he pays 10% more for gold, but borrows 1.20 times more than that 110%, in gold, and buys T-Bills with the difference, he breaks even. (He borrows 120% of the gold "buy" of 110% to the miner from the bank and sells it. (1.2 X 1.1 = 1.32) He pays 110% of th POG to the miner and the rest, or $22.00 of $132.00, buys T-bills and/or derivatives.) With additional straddles of gold, he makes money, if gold does not remain stagnant. Every once in a while, the banks close the loans and demand cash. It is easy to close a derivative position or sell T-Bills and deliver the cash to the bank, or buy-in shorted gold, and deliver. When the bank closes or calls the loan, it announces a SALE of gold! (Already considered sold to the borrower anyway.)
The gold was sold by the borrower perhaps 3 years ago, but the announced sale drives the price down, and makes it that much easier to get the gold to sell to repay the loan. The bank will not make it tough, as they want their money and the only collateral they have is production of the miner.
In order to discern what may be sold, and what is loaned and not yet sold, consider why the borrower borrows gold in the first place. What could he want with it? Of course it is all sold. So if it's sold, and the banks do not "know" it, then what does the banks sale of gold, mean, when it is already loaned out, sold and not returning? You guessed it. It's accounting blarney. You must subtract the sale of gold, from the gold loans already out, and realize that this is a drop in the bucket. How much gold has been loaned out and sold? Well, all of a sum equal to produced, hedged gold. And how much is that? Well, as much as has been bought in the past 12 years at least. That is as much as has been produced, or 30,000 or more tonnes!
A 3500 tonne gold "sale" from an empty vault is not serious.
It may, in a rising price environment create what is called a short squeeze. Gold may not be around at popular prices to return cash to the bank by selling gold. So this may in fact drive the price up.
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