Credit Agricole's Brokerage Declares "Start Hoarding" Gold!

By Jon A. Nones
02 Feb 2006 at 06:00 PM EST

St. LOUIS (ResourceInvestor.com) -- Cheuvreux, the equity brokerage house of the French bank Credit Agricole, distributed a 56-page report today endorsing the findings of the Gold Anti-Trust Action Committee (GATA) that the price of gold has been surreptitiously suppressed by Western central banks and that those banks do not have the gold they claim to have.

The report, written by Cheuvreux's mining sector analyst in London, Paul Mylchreest, is titled Remonetization of Gold: Start Hoarding." It repeatedly cites GATA by name and foresees an "unprecedented" rise in the gold price. But what is more, the report accuses central banks of "covert selling."

According to the report, Cheuvreux has raised its mid-cycle gold price estimate to $900/oz from $750/oz, and sees the possibility of a spike to $2,000/oz, or higher.

"Covert selling (via central bank lending) has artificially depressed the price for a decade," wrote Mylchreest.

According to the IMF, the official figure for gold held by central banks in their vaults is 31,000 tonnes, but the reality is much lower, asserts Cheuvreux.

"Central banks have 10,000-15,000 tonnes of gold less than their officially reported reserves of 31,000," Mylchreest wrote.

This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc., according to the report.

The report begins by saying that back in the 1980s, central banks began to deposit part of their gold holdings with leading bullion banks (such as JPMorgan Chase, Goldman Sachs, Citibank, etc.) in return for a fee.

"The gold lent by central banks was in addition to the well-publicised official selling by many of them, including the U.K., Switzerland, Netherlands, Australia and Canada," wrote Mylchreest.

These central banks were able to depress the gold price by lending and selling gold to bullion banks, according to the report. But when these bullion banks sold off the gold they borrowed, this dramatically increased liquidity in the market.

With low lease rates and the gold price expected to remain weak, hedge funds and the proprietary trading desks of banks saw huge profit potential in the 1990s. However, "when the price started to rise, the bullion banks and their counterparties had built up substantial short positions and were ?caught'."

"Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price," Mylchreest wrote.

Therefore, gold-lending policies of central banks distort the supply and demand picture for the gold market, according to the report. Gold borrowed from central banks and sold into the market has the effect of increasing supply in the short term and depressing the gold price.

Cheuvreux notes a supply deficit in the gold market of around 1,300 tonnes per year before any central bank selling, and perhaps 700 tonnes per year after official sales - but still before covert selling. This compares with world gold mine output of only 2,500 tonnes per year.

"If gold demand is rising and producers are reducing forward selling at the same time, as is currently the case, the deficit in the gold market will become more exaggerated," wrote Mylchreest.

According to the report, this summarizes a potential gold derivatives banking crisis as outlined by GATA. The net position of all the longs and shorts in the derivative market, including all forwards, swaps and options, must balance out.

"It is clear from the above that the foundation of liquidity in the gold derivatives market is the short position created by central bank lending," Mylchreest wrote.

Thus explains Cheuvreux's assertion that gold could rise to $2,000, or higher. Too ambitious?

Gold climbed as high as $579.50 an ounce on the New York Mercantile Exchange today before easing back a bit to close at $576.80, up $2.80. It's trading at levels not seen since January 1981.

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