Contents | Next >

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 However, they do not publish any statistics that would enable market participants to track an even larger source of supply, gold loaned and swapped into the market by central banks.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 exponential 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 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.

“A related aspect of this residual monetary characteristic has been and remains the confidential or secretive nature of most stocks and trade in gold, both absolutely and in comparison with trade and trading in other commodities, from coal to copper. This secretiveness pervades not only the reporting of selling and buying, for investment, speculation and official sector activity, but also for parts of the jewellery or consumer sector of the market, where the metal or the product is not infrequently smuggled between different tax regimes and sales are impossible to record. The gold business would be a stronger and more effective sector for the future if flows and stocks of the business could be more transparently reported, and there were more commonsense consensus or understanding of the business, which in turn might curb the propensity for conspiracy theories in this market.”

LBMA Biennial Dinner 2 November 2006
Toast to The London Bullion Market Association
Kelvin Williams
Former Executive Director, AngloGold Ashanti Limited

Contents | Next >