Prudential says GATA is moving the gold market

Section:

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.