09 October 2008

Central Bank Selling

This FT.com article (you will need to register to read it) says "central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market". This has caused lease rates to rise/forward rates to drop as noted by SilverAxis.

I think it is a bit late for central banks to start worrying about counterparty risk. I have been corresponding with someone who has been watching the markets and gold over the past 20 years and their view after analysing different reported data sets is that central banks are holding closer to 10,000 tonnes than 30,000 tonnes (and this guy knows his data).

I haven’t reviewed his analysis to confirm those numbers, but it makes sense to me as if asked I would have guessed that the legimate market for precious metal borrowing (ie manufacturers) is no where near the amount that is lent out, therefore the balance must have be lent to bullion banks for ultimate use in financing short sales and other gold derivatives. With gold interest rates around 2%, the carry trade doesn’t look that good anymore.

I find it interesting that some gold advocates get hot and bothered about central bank lending/selling. I don’t see the problem. So what if central banks sell their last 10,000t into the market in an attempt to support those banks with either proprietary short positions or who have lend to others who are short without good collateral to cover that exposure. This will supress the price, allowing individuals to buy a cheap prices. Then that part of central bank lending which has been short sold has to be bought back (a short is a future buyer, just as a long is a future seller). If that is not possible, then the lucky ones are those to whom it was short sold.

The end result will be gold in the hands of individuals and what I call “the decades long privatisation of gold” will be complete. As per Professor Fekete, the power over the money “supply” will then be in the hands of the average person, where it should be:

"Since gold coins served as bank reserves under the gold standard, by withdrawing their deposits and converting their notes into gold coins savers could force the banks to contract outstanding credit. ... Not only did it have the ballot paper, the electorate also had the gold coin with which to vote. And vote it did, on every business day. If it did not like the credit policies of the banks and the government the whip, gold hoarding, was at hand."

Surely this current crisis has shown that individuals couldn’t be any worse than central banks in managing a country's money supply/credit/interest?

1 comment:

Kevin said...

Excellent point. The GATA thesis that gold leasing was the secret behind the strong dollar policy seems less flakely every day.