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A tale of two precious metals: Lending emerges as new element in gold supplyTHE third-quarter update of Gold Demand Trends was presented in Johannesburg this week by George Milling-Stanley, manager of gold-market analysis for the World Gold Council (WGC). Milling-Stanley was not quite at a loss to explain why the fundamentally strong picture of gold demand was not translating into a higher gold price. A fourth component of gold supply - gold lending by central banks - is becoming the biggest player in the total equation. The other three, newly mined production, recycled gold and central-bank sales, are widely known and readily quantified but gold lending has taken off recently as central banks seek to increase the return available on their gold holdings. Milling-Stanley says this gold is only loaned and will need to be repaid as London good-delivery bars: central banks often call the gold back at the end of the year. The trouble is much of it has been manufactured into jewellery. Milling-Stanley hears only whispers of defaulters on these gold loans. "There is some nervousness in the gold market, some concern about the depth of the liquidity." He notes more than 3 000 tons and maybe even 10 000 tons have been borrowed and are owed back. "It will be very interesting to watch trends in gold-leasing rates. At the moment there is an inverted yield-curve where short-term leasing rates exceed long-term rates. This suggests big speculators in the markets. "I believe hedge-fund short sales are largely responsible for a substantial increase in the supply of gold to the market - gold that has been borrowed back from central banks and sold to finance these short positions. "This is what has been depressing the price so far in 1997. There is no doubt the large speculators are taking advantage of the market's fear of central bank sales to bully the gold price down and make huge profits." On central bank sales, Milling-Stanley notes more than a hint of hysteria. "It is completely the wrong idea to think there is wholesale dumping. There have been only three significant sales of gold by central banks in the past two years. This means that 177 countries still think it is a good idea to hold gold," Milling-Stanley says. The Russian finance ministry reported a sale of 31 tons of gold, proceeds of which were needed to pay state debt to the gold mining industry. However, the central bank of the Russian Federation repeated its intention to continue rebuilding the country's gold reserves, buying 67 tons out of a planned 100 tons for 1997. "It may be that a little more clarity from the world's central banks about their actions and especially their intentions with regard to their gold reserves, would help to improve the climate and the gold price." South Korea has upset the apple cart too. It has imported 500 tons and exported 450 tons of gold in the year to date. "It is a round-tripping exercise. Korean interest rates have been kept very high to try to protect the currency. It is very expensive to borrow in won but not to borrow gold. Korea has been buying gold, routing it in and out for general financing purposes." Milling-Stanley reports record third-quarter demand of 705.3 tons, 6% higher than in the same period last year. This covers about 80% of total demand: the WGC is not represented in Africa, parts of Latin America, the former communist bloc and parts of the Middle East, although it has just recruited its first member in China. Gold Demand Trends divides the world into developing and developed markets. Developing markets recorded 17% more demand in the first three quarters of this year compared with last year, with Asia as a whole down. Brazil and Mexico were up 22% and the Middle East and India 30%. The developed markets reported a decrease of 2% in demand although investment demand picked up well in the US.
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