Peter Brimelow: Indians buying up gold supplied by Fed?

By Peter Brimelow
MarketWatch.com
Monday, March 31, 2008

NEW YORK -- The gold bugs are coming out of their holes again.

When I last wrote on gold, the metal was challenging $1,000, a level which was passed that day.

After that, gold's stumbled, down $70 at one point, although up $10.60 over this past week.

But two crucial factors have swung encouragingly, rallying the gold bugs.

The first: the price of gold in India, by far the world's largest importer of the metal. India is a massive buyer of bullion for jewelry and cares little for the rest of the world's concerns. If the Indians want to buy, they will.

India has a fairly high import duty on gold. If you subtract the duty from the world price, you find whether the domestic price makes importing profitable. It has been moved decisively into profitable territory for legal imports this week. This has not been the case for some time.

For reasons that mystify me, the only regular source of this Indian data is Bill Murphy's Website, Le Metropole Cafe. Yet this is the key calculation for verifying Indian demand.

Over the weekend, Le Metropole posted this: "Indian ex-duty premiums -- Friday: a.m.$1.85, p.m. $2.55, with world gold at $943.75 and $944.55. Ample for legal imports."

Anyone familiar with the physical trade must find it hard to envisage much further price decline.

The second encouraging gold bugs: The lease rate for gold. This is the cost of borrowing gold.

Thirty years ago, this was a detail, but with the huge expansion of lending to gold mining companies in the 1980s it became a big deal. In particular it was an important part of the argument of outfits like Gold Anti-Trust Action Committee (GATA), which argued that secretive activity in the gold market by central banks was crucial to understanding what was happening with gold.

In the past few days a strange thing has happened. Australia's The Privateer says, "the shorter term (one and two-month) rates have actually gone into negative territory this week."

In other words, gold is being supplied to the market by the central banks. The Privateer goes on: "We do not recall a previous instance of this, and there certainly has not been one since the cold bull market began in 2001-02. ...

"We have not -- until now -- seen a situation in which the central banks are actually paying the bullion banks, hedge funds, gold miners, et al. to borrow the stuff. And please don't forget that, in this context, leasing gold is actually 'shorting' gold. Gold is not 'leased' to be hoarded; it is 'leased' to be sold for something that pays a far higher rate of interest. ... The practice of 'leasing gold -- and silver' by the central banks has been one of their best means of suppressing the prices of these precious metals for a long time."

Interestingly The Privateer's wonderful $US 5x3 Point and figure chart withstood this week's slump. See chart:

http://www.the-privateer.com/chart/gold-pf.html

Goldbug conclusion: Central banks, led surreptitiously by the Fed, are supplying physical gold to the market. And wise heads like the Indians are buying it.

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