Gold and the Banking Sector

There are two major ways in which central banks give to the supply side of gold and this is done by outright sales and gold leasing which is something that is not completely understood, or by lending it. In the process in which a central bank lends a mining company or a financial institution gold, the precious metal is then sold in the market, and it is considered the same as an official sector sale.

It has been said that the central banks have sent out around 6,000 tones to the lending market during the years and this is around two years worth of output from the gold mines in the world. In accordance with what the GAE has said, leasing used to come from central banks in developing countries that were anxious for some gold return, but progressively bigger European central banks, such as Belgian, Austrian, German, Netherlands and United Kingdom central banks have gone in and have involved themselves. The Swiss National Bank has also become involved and participated too. This type or lending set off the mine company forward selling boom that occurred in the 1990’s while there was a small amount going to several hedge funds and other financial institutions that were involved in an amount of carry trade operations.

It was expected that the central banks at some point that were involved in lending gold would reach the limits when it came to the management of gold reserves. In which case, leased gold would fade away form the supply demand tables, or would at least be reduced in a great way and in 1999 this is exactly what occurred when the top central banks in Europe put a crease in the unrestrictive environment in the lending market when the Central Bank Gold Agreement was signed and this was what then regulated the amount of gold that could be lent or sold. It is possible that because of the quick growth in leasing in 1989 to 1999 was the reason for the agreement on gold.

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