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Gold derivaties study comes up with interesting findings

G. Chandrashekhar

MUMBAI, Sept. 13

A DETAILED study, ``Gold Derivatives: A Market View'' commissioned by the World Gold Council (WGC) and conducted by Dr. Jessica Cross has come up with interesting findings relating to the volume of gold lending pool, the volume of official gold left to b e lent and lease rates, among others.

According to the study, at the end of last year the total gold lending pool was 5,230 tonnes of which producers were by far the largest borrowers at 3,021 tonnes and the official sector was by far the largest lenders.

The Cross study, together with a similar detailed investigative survey by Gold Field Minerals Services, now lays to rest the submission of a few that the lending pool was nearly 10,000 tonnes and that the short position was several thousand tonnes.

Easily, the largest lenders of gold are the official sector and according to Dr. Cross, there is only around 1,000 tonnes of gold (non-European Agreement signatories) left to be lent.

Importantly, the report pointed out, central banks appeared to pay little attention to the lease rate received on the gold lent. In other words, there was virtually no elasticity of official lending supply to lease rates.

Also, the report said, even if there was a total moratorium on lending from every central bank, then there would be a significant increase in private sector lending, particularly from the East, from countries such as India, to cover the gap.

Analysts said, more realistically, any sort of limit on official sector lending appears unlikely to have any real impact as, according to Dr. Cross, hedging activity is set to decline gradually over time with a notable trend away from more complex deriva tive products following the drama surrounding the October 1999 price surge.

Inferring that lease rates can be expected to remain low, the study said, low exploration expenditure and falling assumed gold prices suggest that global gold reserves will also decline over time.

Observing that there was no evidence of a massive short position in gold, the study could find no evidence of collusive behaviour in the gold market or any other evidence of a conspiracy between the major sectors and the participants.