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Situation Analysis
Central banks are the largest holders of gold reserves in the world. Those
central banks provide the public with regular reports of their gold purchases
and sales. However, they do not publish any statistics that would enable
market participants to track an even larger source of supply, gold loaned and
swapped into the market by central banks. There is no question that the
levels of gold loaned and swapped into the market by central banks exert a significant
influence on the gold price. However, since the loans and swaps are not
reliably accounted for, only a few, powerful insiders know their extent, duration,
and terms. The International Monetary Fund (IMF) has the ability to change
this accounting treatment by implementing new regulations on central bank reporting
of gold reserves. Blanchard and Company, Inc. believes that, as the IMF
begins implementing changes to gold reserve accounting regulations, the gold
market will become more accessible and transparent for all market participants.
The gold price has increased from a low of $270 per ounce in 2001 to over
$600 per ounce today without a completely transparent market. As more
and more transparent governance is implemented in the market, gold prices will
experience significant growth because they will become a reflection of a fair
and equitable market for all participants.
We believe that the gold lending and swap market is a very misunderstood and
often, overlooked aspect of our market that has a great deal more influence
on prices than some participants in the market publicly credit. This paper
hopes to explain not only the lending market, but also its impact on prices
and how transparency moving forward will contribute to rising prices. The
creation of the Washington Agreement in 1999 (now referred to as the Central
Bank Gold Agreement) was the beginning of a more transparent gold market; publicizing
lending information is the logical extension of that agreement. Blanchard
and Company, Inc. believes strongly in the financial benefits of gold ownership
as a diversification and believes that the financial benefits of gold ownership
can only be enhanced as the gold market becomes more transparent.
“The second way central banks can have an influence on gold is through
the lending of some of their gold in the lease market. Central banks have expanded
their leasing activities over the recent years, seeking an improvement in the
return on their holdings. Actually, central banks are the dominant players
in this relatively narrow market. The size of this market is very difficult
to evaluate. Around the year 2000, most market participants mentioned
the figure 5,000-5,500 tonnes.”
LBMA Conference 2004
Jean-François Rigaudy
Head of Treasury, Bank for International Settlements
http://www.lbma.org.uk/conf2004/2b.rigaudy_LBMAConf2004.pdf
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