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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Zardoz who wrote (64666)	2/27/2001 5:28:59 PM
From: long-gone	Respond to of 116763

Posted: 2001/02/27 07:00 PM GMT+2 Is the Bank of England behind gold price rally? By: Ken Gooding & David McKay Posted: 02/27/2001 07:00:00 PM \| © Miningweb 1997-2001 One month gold lease rates, or the cost of borrowing gold, have shot up, giving a clear indication that physical supply is very tight at present. Lease rates jumped to 4.1 per cent on Tuesday morning compared with 1.2 per cent at the end of last week and below one per cent at the end of last month. See the graph below. There are suggestions that the Bank of England (BoE) has been withholding bullion from the market, something the Bank has vehemently denied to its banking contacts. However, London bullion market sources suggest that the clearing banks, who take the BoE gold, have not been releasing much to the market. This situation is extremely unusual and has triggered speculation that the clearers know something of importance is on the way, such as an announcement by the central banks similar to so-called Washington Agreement 18-months ago when the central banks announced restrictions on their gold sales. This caused a substantial but short term rise in the gold price. One South African analyst takes the view that lease rate swapping is as the root cause of lack of physical gold liquidity. But if this were to be the case, another $5.00 to $10.00 increase in the gold price might be on the way, but the rally will be short-lived, and not comparable to the escalation in the gold price above $300 per ounce in 1999. In addition, there aren't the vulnerable hedge books of Ashanti Goldfields or Cambior, nor the massive short positions of the gold crisis of October 1999 to sustain a fully-fledged gold rally. But that's just one view. A Toronto-based broker, Pollitt & Co Inc., raises the interesting prospect that the BoE's regular auctions of gold cannot continue at unsustainably low levels: "Back at the BoE, if the cupboard is empty now, where will the gold come from for the next BoE auction? Maybe that's why the last auction was heavily oversubscribed at a premium. "And will the auctions continue," says Murray Pollitt. "The BoE has already sold almost half its meagres reserves (and apparently lent the rest) and there are only one or two auctions to go in the current series. Can it possibly go on making sense to continue these auctions at price levels that are at unsustainably low levels?," Pollitt says. In the meantime, ever alert to market rumours, New York speculators decided to have a punt by buying very short term call options, positions that can be unwound in a few days if the rumours are without foundation or nothing else sensational emerges. Close watchers of central bank behaviour meanwhile suggest they would be very unlikely to make any changes to the Washington Agreement so early in the life of what was meant to be a five-year arrangement. Neither would they be likely to say anything publicly about any decision to make changes to gold lending policies. They would just put the decision into effect. The World Gold Council says that it is clear some central banks have been concerned about the impact their gold lending has on the price – and the value of their holdings. They wonder if central bank lending could not be managed more effectively to counter the downward plunge in the gold price. Meanwhile, those analysts not convinced by the central bank rumours point out the clearing banks could be holding on to their gold simply because they know a big borrowing operation is on the way. "Those traders that have liquidity in hand are tending to hold on to it, while those short of liquidity have had no alternative but to bid it up. "Under these circumstances the cost of holding short positions is becoming increasingly expensive, and with gold prices rising in the wake of higher lease rates, this could trigger some significant short-covering," the World Gold Council says. Is there enough newly mined supply? Pollitt says the bulls and the bears may be shaping up over gold at $260, but is this level too low. If there is to be a shortage of physical gold in the years ahead, where will newly mined supply come from and how much will be supplied into the market. His best guess is that proven and probably gold reserves are about 400 million ounces worldwide of which about half is in South Africa. However, South Africa comprises less than 20 per cent of world supply and is unlikely to increase this position given that year-on-year volumes have been consistently falling. "This leaves the rest of the world with proven and probable reserves of (maybe) 200 million ounces and over 80 per cent of annual production or over 60 million ounces per year. That looks like a reserve life of three or four years if the gold price stays here. And countries like Australia are hedged beyond imagination. Market conditions are clearly unprecedented," Pollitt says. m1.mny.co.za