Source: Mineweb 10/17/2008
“Why was gold down so sharply yesterday?” asks gold guru Jeff Nichols of American Precious Metals advisers – “and this in the face of reportedly record demand from investors for bullion coins and small bars?”

This seeming disparity in the overt supply demand situation looks like an anomaly, but Nichols points out that news that European central banks sold 7.6 tons of gold in the week ending October 10th has certainly been a heavy burden on the price and helps explain why the metal could not move higher last week and, if selling has continued, in the past few days.

But, Nichols reckons, it has been central bank gold loans, even more so than official gold sales, that have really pulled the rug out from under gold. Gold loans by central banks are an alternative, and invisible, means of injecting liquidity into the banking system. These gold loans to banks and bullion dealers by the leading central banks are probably a significant multiple of outright official sales.

In simple terms, a central bank may lend or deposit gold with a banker or bullion dealer who simultaneously sells forward. Even with the recent substantial increase in gold-lending rates, at the end of the day the dealer receives cash in the transaction at a cost that may be advantageous to short-term money-market borrowing costs. Central banks have great freedom to lend gold outside their government-mandated rescue programs and these lending activities are typically hidden by their accounting practices…

But, Nichols avers, in contrast to the day’s gold headline news, continuing strong physical demand for gold has to be a harbinger of gold’s ultimate ascent. “It’s no longer just “gold bugs” buying the yellow metal but regular investors and savers of all stripes.” says Nichols. “These are not traders looking for quick gains but scared people driven by fear seeking to protect their wealth.”…

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