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Is The Gold Price Fixing Game About To End?

February 26, 2001

On Thursday of last week, GATA reported that The World Gold Council sent out a letter that day to its sponsoring members. Bull Murphy said that from what he heard it spoke of some problems in the physical gold market. He was also told that a letter of this nature from the WGC was highly unusual.

As Thursday progressed, there was continued talk in New York about a physical gold problem. It appears that while there is central bank gold around, there is not enough refined gold needed by gold users. What was being used for lending is gone, used up - and is now jewelry around someone's neck in India. The Bank of England and others are scrambling to cover current needs. That could explain why some official sector entity is selling gold right now - so that it can be sent to refineries.


The following day, GATA published the following quotes last week from a highly unusual letter that the World Gold Council sent its members.

"According to usually reliable market sources, the Bank of England has not been lending gold over the past few days. This is unprecedented as its short-term lending is considered a vital tool in the smooth running of the London market. The Bank's explanation for this (confidentially ) is that many client central banks had lent out for longer periods than normal around the WAG period, and that as the loans matured they were not being renewed, creating a temporary tightness in liquidity. The market is regarding this explanation with some suspicion, however, suspecting that more may be involved.

"It has indeed been suggested that another joint central bank move on gold lending may be imminent, cutting the amount of gold available for lending.

"We have no firm evidence for such a move. However, if this were to happen, then lease rates would soar; non-WAG countries have increased their lending substantially in recent months and it is unlikely that they could fill any liquidity gap produced. In these circumstances, a price spike could easily develop; shorts would be quick to cover while other borrowers would be forced to buy as the rolling over of existing loans became more difficult to achieve."

Bill Murphy he e-mail message by asking, "Can you smell the smoke?"


The report by the World Gold Council is consistent with reports of rising short term interest rates on gold loans. GATA reported last week, "On January 3rd 2001, gold could be leased for a 1-year term at 1.40%. Bullion banks (or whoever lends the stuff) was confident enough that this price adequately captured whatever risk they could confidently predict for a year in advance. One month rates were at 3/4 %.

"By last week (February 15th) the one-year rate that had stayed flat in the low 1.35% range for 6 weeks aggressively moved up to 1.5%, and 1-month rates were at 1 1/4%. Change in confidence? Unforeseen change in economic conditions? I'll say.

"By today (February 22nd), the lease rates 1, 2, 3 and 6 months are all in the neighborhood of 1.54%-1.59%. Suddenly the 1.40 that they were willing to lock in for a year just 6 short weeks ago looks like a very bad deal. Likewise the 0.9% they were willing to lock in for a 6 month lease."

We have been hopeful so many times over the past twenty years that we cannot help but be CAUTIOUSLY optimistic about gold now. Yet given our anticipation of a major decline in the U.S. economy and the U.S. dollar, the time for gold and silver too may be at hand. This is not necessarily good news, because it means we could witness major economic chaos and even civil strife. But if history provides any guide for the future, owning gold should help cushion the blow that we think is on its way.


Jay Taylor, Editor of J Taylor's Gold & Technology Stocks

A gold nugget can be worth three to four times the value of the gold it contains because they are so rare.
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