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

To: goldsnow who wrote (4911)	12/29/1997 8:03:00 PM
From: JD	Read Replies (3) \| Respond to of 116762

Interesting article on gold leasing and German CB. A little dated but I think very relevent and quite informative. From reuters. I've taken the liberty of bolding parts I thought might be of special interest. My apologies if this is repeat post. *************************************************************************** Bundesbank gold policy may be way forward-analysts 16:47:02 12 NOV 1997 By Brian Spoors LONDON, Nov 12 (Reuters) - The Bundesbank's announcement on Wednesday that it had been lending gold from its reserves to the bullion market could be symptomatic of the way the central banks treat their reserves in future, gold industry sources said. Germany's Bundesbank holds 3,700 tonnes of gold bullion, 36 percent of its total reserves** and has enjoyed a reputation as one of the world's most staunchly conservative national banks. "What they are doing is making use of their assets. You can make a better rate of return through lending gold than you can from holding some government bonds," said metals markets analyst Rhona O'Connell at stockbroker T. Hoare and Co. Wolfgang Wrzesniok-Rossbach, head of precious metals trading at Dresdner Bank AG <DRSD.F>* said 1996 estimates are that 65 central banks were involved in gold lending, with a total volume of 2,750 tonnes. "This is a totally normal process," he said. "I think this is a relatively new business for the Bundesbank. I would be very surprised if they had started it already last year. The Bundesbank has behaved relatively conservatively with regard to gold," he added. The central banks can use part of their gold reserves to lend to the bullion banks and write swaps and options. The income from these transactions helps offset the cost of holding gold which is a non interest bearing asset. Andy Smith the precious metals analyst at Union Bank of Switzerland recently estimated the cost to the 12 largest central bank gold holders in terms of lost interest income totalled $15 billion annually. The world's central banks hold over 28,000 tonnes of gold. Annual newly mined gold production totals about 2,400 tonnes. The central banks' lending gives the gold market its liquidity and allows the bullion banks to lend in turn, for example to finance new gold mines. Gold producers borrow from the banks in order to lock in future prices by selling gold which they have not yet mined. The gold is repaid to the bullion bank and thence to the central bank when the metal is finally produced. Gold fabricators such as jewellers also use borrowed gold. Typically they will lease gold while it is being fabricated and repay the lease cost when they have sold their products. "As long as the cost of borrowing the gold is cheaper than borrowing money (with which to buy the gold ouright), then it makes sense for the jewellers to lease rather than buy," said Harriet Hunnable, gold derivatives specialist at Merrill Lynch. Gold interest rates fluctuate. Today the implied lease rate was 2.16 percent for a month but they have been as low as 0.5 to one percent and as high as six percent. T. Hoare and Co's O'Connell noted the market feeling was more central banks had come into the lending market this year. However there would be a limit to the amount of liquidity made available. "If they all start lending, the rates will come down to uneconomic levels," she said. The Bundesbank confirmed it had been lending gold to offset some of the costs of maintaining its 3,700-tonne gold reserves but firmly denied any plans to sell part of its gold. German newspapers said Bundesbank is using 10 percent of gold in lending. "That is the absolute ceiling and I think it is probably rather less," said Wrzesniok-Rossbach. Germany's daily Boersen-Zeitung, citing market estimates, said the Bundesbank may be lending some 10 percent of its gold reserves, generating returns of some $70 million a year. "That sounds to be in the realm of possibility. It is not a huge sum," said BHF Bank economist Uwe Angenendt. Angenendt noted that it was "no surprise" that the Bundesbank was lending gold. Flooded by inquiries amid a fresh bout of market speculation about central bank gold sales, the German central bank issued a clear statement: "Selling gold reserves is not an issue for the Bundesbank. The Bundesbank has absolutely no intentions of selling gold." The German central bank, which this summer torpedoed government plans to revalue gold reserves to ease Germany's path to European monetary union, has repeatedly denied that it plans to sell any of its gold in the face of recurring speculation. Gold prices have been hovering at their lowest levels in more than a decade, pressured after the Dutch central bank said it had sold 300 tonnes of gold in January and after Switzerland indicated it might sell 1,400 tonnes of gold. The Bundesbank's statement followed the publication of an interview in the Boersen Zeitung with the Bundesbank's vice president and money market expert Johann Wilhelm Gaddum who also denied the Bundesbank was condering selling gold. --Brian Spoors London Newsroom +44 171 542 8058