September 14, 2011 6:29 pm
Banks use gold to get dollar funds
By Jack Farchy in London
European banks are rushing to use their gold to access much-needed dollar funding, in the latest sign of the growing liquidity crunch for the continent’s financial institutions.
Gold dealers and analysts said that there had been a strong move to lend gold in the market in exchange for dollars in the past week, accelerating in recent days.
The rush has pushed gold leasing rates – the implied interest rate for lending gold in the market in exchange for dollars – to record lows, according to Thomson Reuters data. The one-month gold leasing rate has plunged to a historic low of -0.48 per cent, suggesting that a bank lending gold for one month would have to pay to do so, at an annualised rate of 0.48 per cent.
Traders cautioned that few, if any, banks were likely to receive those rates, however, saying that they had been skewed by a widespread reluctance among bullion banks to take gold for dollars.
Large bullion-dealing banks take gold on deposit from a range of customers such as investors, central banks and other commercial banks. Although they often lend out some of that gold around the end of quarterly reporting periods in order to reduce their liabilities, the latest move is unusually dramatic and highlights the stresses in the dollar funding market, according to bankers. The banks do not, however, lend all their gold and some of it is held in accounts that preclude them for using it for trading.
Edel Tully, precious metals strategist at UBS, wrote in a note to clients that the drop in lease rates suggested there was a lot of interest in exchanging gold for dollars.
“Pressure on banks’ balance sheets in the last couple of months is exacerbating the usual end-quarter balance sheet-specific action,” she added.
The cost for European banks to swap euros into dollars has jumped fivefold since June, hitting the highest levels since December 2008. The main reason for the spike is the demand for the US currency due to its growing status as a haven in the face of rising worries of an imminent Greek default that could spark a deeper sovereign debt crisis.
Traders said that the large volume of lending was one reason gold prices had struggled to achieve upward momentum, despite growing concerns over the eurozone crisis.
Spot bullion was trading at $1,818 a troy ounce on Wednesday, down 0.8 per cent on the day. It has fallen 5.3 per cent from a nominal record high of $1,920.30 last week, although traders say there has been strong demand from Asian buyers whenever prices fall below $1,800.
“A sharp decline in lease rates over the past two days is theoretically bearish gold as holders seek to use bullion holdings to raise cash,” said James Steel, precious metals analyst at HSBC, in a note to clients. “But it may also be a sign of distress which is supportive of gold.”
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Copyright The Financial Times Limited 2011
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