A recent gold article published on Mineweb - Why the fall in the gold price when physical gold remains in huge demand? - generated much interest. It referred to a suggestion put forward by Jeff Nichols of American Precious Metals Advisors that a part of the gold price decline was due to gold leasing and lending by Central Banks, and led to questions about the mechanics of gold lending. Nichols feels the recent breakdown in the price of gold has been much more a reflection of stepped up Central Bank lending of gold -- and much less a result of actual Central Bank gold sales or liquidation of long futures positions by hedge funds and other large-scale speculators, both of which seem to have grabbed all of the credit among gold analysts and the financial press. Because of the interest raised, Nichols has extrapolated on this in a new Gold Briefing. He comments that "Central Banks, eager to earn a small return on their official reserve holdings, have long been lenders of gold. However, the ownership of gold lent to (or on deposit with) bullion banks remains with the Central Bank lender. Thus, gold-lending activities are off the books and gold lent continues to be counted by the lender as official monetary reserves. Hence, there is no statistical reporting by any of the central banks engaged in gold lending - and analysts are, like Sherlock Holmes, left to deduce this important piece of the gold-market puzzle." It is Nichols' firm conviction that gold loans to bullion banks in recent weeks and months have been an off-balance sheet tool utilized by some central banks to augment their efforts to provide liquidity to the banking system -- since gold lent (placed on deposit) is sold for cash and typically reinvested in U.S. Treasury bills or other securities by the bullion bank/gold dealer. Nichols says in the main body of his Gold Briefing that "gold's latest swift decent is a direct consequence of the unfolding global economic situation, the playing out of the credit crisis, and the onset of recession. The yellow metal was simply overwhelmed by the massive indiscriminate liquidation of financial assets and commodities - liquidation prompted by the reassessment of global economic prospects and the likely diminishing demand for one commodity after another." "To a large extent" Nichols says, "gold was sold because the yellow metal is included in several important indexed baskets of commodities that have been liquidated en masse by hedge funds and institutional traders. In addition, negative momentum, automatic program selling, and technical trading has compounded the damage." Coupled with the increased Central Bank lending assumed above, all this has contributed greatly to gold-price weakness in recent weeks. Nichols comments further that this does not mean that gold is no longer a safe haven in times of financial crisis as seen at present but does demonstrate that at times of financial panic it can fall victim to developments in other asset markets. "Does this mean" says Nichols, "that gold is suddenly no longer a safe haven in turbulent times . . . or a hedge against inflation . . . or a useful portfolio diversifier? Of course not -- but it does demonstrate that at times of panic even the yellow metal can fall victim to developments in other asset markets.". Nichols remains confident on gold's bullish longer-term prospects and feels they are as bright today, if not brighter, than they seemed when gold breached the $1,000 level earlier this year. "Nevertheless" he goes on to say, "in the near term, gold remains vulnerable to the same forces that knocked the metal's price down from over $800 an ounce. It is easy to imagine, in the wink of an eye, gold at $700 - or even less - before the yellow metal begins to shine once again."

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