Oct 18, 2008

Why the fall in the gold price when physical gold remains in huge demand?

Heavy secret gold leasing may explain disparity in gold prices

MineWeb's Lawrence Williams interviews Jeff Nichols of American Precious Metals advisers about gold's decline on the commodities exchanges even as demand for the metal explodes, and they come up with a likely explanation -- heavy surreptitious gold leasing by central banks.

Williams writes: "Nichols reckons it has been central bank gold loans -- even more so than official gold sales -- that have really pulled the rug out from under gold. Gold loans by central banks are an alternative -- and invisible -- means of injecting liquidity into the banking system. These gold loans to banks and bullion dealers by the leading central banks are probably a significant multiple of outright official sales.

"In simple terms, a central bank may lend or deposit gold with a banker or bullion dealer who simultaneously sells forward. Even with the recent substantial increase in gold-lending rates, at the end of the day the dealer receives cash in the transaction at a cost that may be advantageous to short-term money-market borrowing costs. Central banks have great freedom to lend gold outside their government-mandated rescue programs and these lending activities are typically hidden by their accounting practices."

That is, more market manipulation by central banks, kept secret from the public and most investors, concealed on the central banks' own books, but executed through a few favored financial houses that can trade on their knowledge of the secret government policy and make huge profits for providing the central banks with cover.

Williams' interview with Nichols is headlined "Why the Fall in the Gold Price When Physical Gold Remains in Huge Demand?" and you can find it at MineWeb HERE

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