$ Silver $

the basic mechanism of the gold carry trade is as follows afaik:

1. central bank lends physical gold to bullion bank for gold interest rate (historically 1-2%)

2. bullion bank (basically most IB's i believe) sells gold in the spot mkt to raise cash.

3. bullion bank lends cash elsewhere for market interest rate, arbing the difference

so it serves both parties... it creates credit from the central bank's pov, and it's a profitable arb from the bullion bank's pov. the only problem with this form of credit creation is that recovering the physical gold in the spot mkt creates monetary instability as gold shoots vertical. it's a real problem. the credit orgy just went way too far. central banks worldwide have lent out 30-50% of their physical metal

 

I came across a blog this weekend called

silver axis ... also institutional investor magazine
has an article on the silver etf

now if only someone could tell me if the next 50 cents move is up or down from these levels !

 

Yes, it is.

 

Avid-- You're assumptions are not correct.

If a CB lends gold to an IB, most likely the metal is then re-lent to a gold miner, who sells it to raise cash for operating or debt reduction purposes. The physical sale by the miner, acts as a hedge for part of the mines output, and that output is generally used to support the credit facility. So, as long as gold is mined and re-deliverdd to the bank, there is no gold price exposure.

The last IB who tried to do what you suggest was Drexel - you can probably search out on your own to see how that worked out for them. Any arb potential is always weighed against the short squeeze risk , a 1% or 2% gain, as you suggest, with a perhaps 5% loss on price risk, if not more, is not worth it.

There is no incentive for an IB to do what you suggest as the spreads do not justify the risk. Your view may have been created as many of these steps occur in nano-seconds and do not appear to be independent, but legally, they are.

There are many other ways a CB creates credit for their financial system. Perhaps reading Marcia Stigum's book, Money Markets, would be of help to you.

 

Anyone have opinions on silver mining stocks at these levels?

SIL, CDE? Seem rich but in these markets, who knows.

 

very interesting tomcole, thanks, it sounds like i don't have the details firm on what i've been reading. the book you recommend sounds good

most of the working knowledge i've been discussing on the gold carry and underreported central bank reserves is lifted from the 2005 Cheuvreux gold report which i believe is at least a decent institutional source.

the way you describe it makes sense esp wrt the symbiosys with hedgers, but my understanding is that the central banks never replenished the lent metal

so if that's correct, the exposure is at the central banks, not the IBs then it sounds

 

Theres a lot of mis-information in the market, especially at the retail level.

Perhaps you should ask the folks saying CBs lend gold and never get it back, to show you exactly from which accounts the gold came from. I mean at a certian point the accounts had to reflect some balances or else where did it come from?

 

thats a good question

it may take me some time to find a solid answer, but for starters the report states that IMF guidelines for central bank accounting of gold reserves don't discriminate between the amount of gold remaining in their vaults and the amount that has been leased or swapped out. so at least on the regulatory level, no accounting is apparently required to lend into a 300Bn market in gold derivatives.

let's see what else is out there

 

also: in their annual reports, most central banks report "gold and gold receivables" as one item.

have i personally read any central bank annual reports? i never considered it a priority until i started having a stake to protect and the mkt started demanding gold in the high 500's. it's hard to argue with history

 

The last serious CB who mis-reported to the IMF was the Russians in early 90s. They came clean and paid the price through the late 90s as they re-built reserves.

Any serious CB who mis-reports and has borrowings will get crushed - its simply not worth their effort.

But the story is deeper - shouldnt the folks telling you this story be able to show a decrease in gold accounts versus increase in cash? You cant affect one part of the balance sheet without an offset. Or are they simply claiming that they lent the gold at 1% to an IB with the understandng the IB didnt have to re-pay it and could keep the proceeds from the sale? Good deal for an IB, but the IB then has to show the profits somewhere, right?

Ask your friends which IB sold all this gold and how they reported it? Not reporting income is a big no-no for an IB, especially a IB big enough to deal direct with CBs.