March 11, 2001 Portfolios, Etc.: A Stirring in the Long-Suffering Gold Market JONATHAN FUERBRINGER A tremor is rumbling through the gold market. The interest rate for lending gold, which generally hovers around 1 percent, was above 2 percent for 10 trading days and then surged over 6 percent on Friday. What does this seismic change mean? Is it temporary, like some past spikes? Or will it persist? If it does, it would mean higher gold prices ahead. Higher prices are what the gold market needs. With a jump of $5.40 on Friday after the surge in lease rates, gold for April delivery was at $271.50 an ounce. But gold prices are still down 0.8 percent for the year and just $17.80 above their 20-year low. A rally would help gold stocks, which are already among the stock market's best performers this year. Investors betting on such a rally often buy gold-company stocks instead of the metal because stocks get a bigger lift when the price of gold rises. The lease rate is the charge for lending gold to producers, who sell gold to lock in prices for future production, and to investors, who sell gold to go short, hoping to make a profit if the price falls. The lease rate is normally very low because the world's central banks have a lot to lend. For years, gold producers and short-sellers have taken advantage of low lease rates. And because the borrowed gold was sold to hedge or to bet against gold, lending added to the downward pressure on gold prices. So a high lease rate can shift market dynamics. The higher cost discourages short- sellers from betting against gold. Many of them, in fact, buy gold to unwind short positions and, in doing so, push gold prices higher, as happened last week. The higher cost also deters producers from hedging. But determining if the jump in lease rates is temporary or permanent is difficult. First, this surge has no certain explanation. Second, it is hard to judge probable causes in a market so divided between believers in the "magical" qualities of gold and those who dare to treat it as a mere commodity. The increase in the lease rate would be clearly significant if it could be traced to a decision by one or more European central banks to curtail their gold lending. The World Gold Council, which represents major gold producers, has been lobbying central banks to do just that. But while many analysts can say confidently that central banks are unhappy with low leasing rates, they cannot say that a central bank has changed policy. One possibility, however, is that the Bank of England has reduced its lending. That might not be a bad tactic, given that the bank will auction 25 tons of gold on Wednesday as part of its planned sale of 415 tons over three years. If lease rates hold and the price of gold rises, the bank could do better than expected a few weeks ago. It would make sense for central banks to curtail their lending as a way to support the price of gold, which many of them are selling. The problem is that in recent years, any jump in lease rates has attracted other lenders into the market, pushing the rates back down. So while the price of gold has risen with increases in lease rates, it has also fallen quickly as lease rates declined. The last big lease-rate surge came in the summer and fall of 1999, after gold hit what was then 20-year low of $253.70 an ounce. By September, the one-month lease rate was more than 4 percent at an annual rate. Then, on Sept. 26, European central banks announced that they would limit their annual gold sales in the next five years to 400 tons and restrict the amount of gold that they would lend to then-current levels. That sent the lease rate to 9.9 percent. From Sept. 20 to Oct. 6, the gold price jumped almost 30 percent, to $326 an ounce. But by November, the lease rate was back below 1 percent and the price was less than $300. Even if the current lease-rate jump does not last, it should produce a nice pop in gold. And though it may be brief, that is about as good as it gets in the gold market today. Copyright 2001 The New York Times Company -- ----------------- R. A. Hettinga <mailto: [EMAIL PROTECTED]> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED]
