Bed Time Reading---Hi Johnathan
Gold loans may leave Bank with bad debts!
Article excerpted from "The Guardian" (a British newspaper), Thursday April 23 1998 - Dan Atkinson
Speculators and dealers who have borrowed British gold reserves worth as much as 300 million British Pounds Sterling may be unable to repay the Bank of England, industry sources warned last night.
A rising bullion price raised the spectre of defaults by borrowers who have enjoyed more than a decade of easy profits in their dealings with central banks.
One senior industry source warned that some of the nation's gold was now in jewellery form, hanging around the necks of overseas consumers, and could not be reclaimed in a crisis.
Central banks, including the Bank of England, have become enthusiastic lenders of bullion during the past 10 years, accepting low interest rates in return for shedding the responsibility of storing and securing their reserves.
As long as the price kept falling, everyone was happy, particularly the speculators who were able to repay the Bank and other central banks with gold that was cheaper than it had been when they had borrowed it.
But the price has moved up 12% since January and was rising again yesterday. Now speculators who borrowed Britain's gold and sold it on to others- including jewellery makers- might have to buy more expensive bullion bars elsewhere to cover their debts. Were significant numbers unable to do so the resulting turmoil could threaten London's pivotal position in the international gold market.
The crunch could be exacerbated by the increasing tendency of all central banks to widen their list of approved borrowers, thus taking in organisations with lower credit ratings. An analyst warned yesterday that credit ratings were all very well during normal times but "gold should be there for an abnormal occasion".
Central banks have traditionally held gold as a "bedrock" asset with which to back their currencies. Only the Swiss franc is still explicitly backed by a given quantity of bullion. However, other trading nations have kept highly visible gold reserves close at hand.
Until this year speculators have enjoyed a one-way bet in their dealings with central banks. They have borrowed gold at a low rate of interest, sold it for dollars and invested the dollars at a higher rate of interest.
When the time came to repay the gold, the price- sliding almost without interruption from its near $1000-an-ounce peak in January 1980- would have fallen further, meaning a tidy gain for the speculators on top of the profit they would have made from investing in dollars.
One analyst said yesterday: "It has been a money machine." Bullion banks and other players had made huge prifits in their dealings with the BAnk of England, he said.
But the gold price has bounced back from an 18-year low in January, and yesterday was up from $307.5 an ounce to $312.75.
One source warned that some bullion banks might be particularly vulnerable, as they were in the position of borrowing short-term from the Bank to lend longer-term to speculators, jewellery manufacturers and others. He added that all involved in borrowing from central banks had behaved as if the price would drop forever and that the loans could always be repaid in cheaper gold.
It is not known what proportion of Britain's 573 tonnes of gold is on loan, but the international average is about 10% of reserves.
Note
Gold loans and deficits caused by short-sales are estimated at 8000 tonnes, according to analyst Frank Veneroso (see conference call transcript of Tuesday, Dec. 9 1997):
mcomm.com
On November 12th, 1997, he claimed that the world gold market's gap between supply and demand was 700 tonnes larger than estimated- so that demand for gold to cover short market positions will eventually send the price of gold soaring. |
