Official Sector Lending

 Central banks contribute to the side of supply of the fundamentals in a couple of important forms: outright sales, ad the little-comprehended process of gold leasing or lending. When a central bank lends a mining business or financial institution gold, the gold is sold in the market, this way they have the same effect as a sale in the official sector. According to the Gold Avenue Encyclopedia, GAE, about eighty central banks have given four thousand six hundred-fifty tones to the lending market over the years. In nineteen ninety-three, the figure stood at roughly two thousand tones.

The present leasing pool encompasses the equivalent of almost two years’ output from the world’s gold mines. According to the GAE, initially, leasing often came from central banks in developing countries, anxious for some return on gold but, increasingly, major European central banks, including Netherlands, German, U.K., Belgian and Austrian central banks, came to participate. Even the Swiss National Bank added itself to this. GFMS calculates that between nineteen ninety-five and nineteen ninety-nine more than sixty percent of new leasing came from European central banks. As we mentioned previously, this lending fueled the mine company forward selling boom of the nineteen nineties, with a smaller amount going to many hedge funds and other financial institutions compromised in many carry-trade operations.

It could be predicted that at some moment the central banks involved in gold lending might reach their limits with respect to the wise handling of gold reserves. Leased gold would then disappear from the supply-demand tables, or at least be considerably reduced. This is exactly what occurred in nineteen ninety-nine, when Europe’s most important central banks put a crimp in the freewheeling atmosphere in the lending market by signing the Central Bank Gold Agreement, which regulated the amount of gold central banks could sell and lend. The quick growth in the lease pool between nineteen eighty-nine and nineteen ninety-nine, and the threat its repayment might eventually have posed for the bullion bank underwriters, could very well have been one of the secret reasons for that landmark gold agreement.