7:27p ET Tuesday, February 27, 2001 Dear Friend of GATA and Gold: You may enjoy this Reuters story about the rising gold lease rates. This story makes it seem that perpetual gold bear Andy Smith is whistling past the graveyard. Here he suggests that South American countries still have gold to lend. Well, maybe the wife of Paraguay's finance minister has a nice necklace.... CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. * * * Spiralling gold lease rates spur central bank talk By Amanda Cooper LONDON, Feb 27 (Reuters) -- The gold market was awash with talk on Tuesday of possible central bank involvement in the lending market as nearby lease rates jumped, but analysts played down the increase. The Bank of England declined to comment on speculation that it had been forced to borrow back gold after overexposing itself on the lending market. Analyst Andy Smith of Mitsui said, "The only fact we have is that gold lending rates went up to 4 percent this morning, from 1 percent yesterday, so the lease market is tighter -- then we have the embroidery." Late on Tuesday one-month lease rates were indicated at 3.93 percent, up from 1 percent at the end of last week. "There is less gold around to borrow because there is less supply of gold lent into the market, because maybe a few central banks have taken gold back because they believed the lease rates were too low," Smith said. Central banks are holders of large quantities of gold and frequently lend part of their reserves to the market in exchange for dollars, which usually offer more attractive yearly returns. In September 1999 gold lease rates rocketed to 10 percent in the wake of the Washington Agreement, which was ratified by 15 European central banks -- including the Bank of England -- to limit their gold sales and lending for a five-year period. The deal was signed just as the price was staggering to recover from 20-year lows at $255 a troy ounce reached the previous month. Some traders said that one explanation for the higher rates could be that a group of central banks was tightening the screws on the lease market ahead of a decision to scale back their lending. Others were less convinced that the sudden changes in the rates had anything to do with the Washington Agreement signatories. "This could not have been any of the banks in the Washington Agreement. None of them would break it at this stage," said one dealer. Another trader said the Bank of England was an unlikely suspect, and that the activity could well stem from a central bank outside the Washington Agreement. "There is still plenty of gold available in central banks that do not belong to the agreement, like the South Americans, even if it is not in the same quantities as the Europeans," he said. In any case, most believed that tightness would be short-lived, and would not translate necessarily into higher spot prices over the longer term. "The market is still relatively tight, but people are having no trouble getting hold of it. But of course they have to pay the price for that," said one European trader. "The gold market is a small village, and a little bit of gossip spreads like wildfire," Mitsui's Smith said, adding that he expected lease rates to ease very quickly. The World Gold Council (WGC), a London-based lobby group representing the gold industry, was more positive. In its weekly report published on Tuesday, the WGC said traders holding gold were able to command higher prices from those needing liquidity. "Under these circumstances the cost of holding short positions is becoming increasingly expensive, and with gold prices rising in the wake of higher lease rates, this could trigger some significant short covering," said WGC head George Milling-Stanley. Spot gold was indicated at $267.70/$268.20 at 1730 GMT, down from a high of $269.25 earlier in the day and down from its London close at $268.10/268.70. -END- Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
