Provided
a considerable part of the capital for the gold mining boom of the 1980s. Mining
companies borrowed gold, sold it spot giving them immediate cash flow, while selling
part of their future production forward
to repay the loan and interest. Since the gold could often be borrowed at between
3 and 4 per cent, it was a much cheaper way of raising finance than borrowing
money and easier than going to the equity market which was disillusioned with
gold shares after the stock market collapse of 1987. The number and scale of loans
put considerable pressure on the gold price
in the peak year of 1988 when eighty-four new loans involving over 150 tonnes
(4.8 million ounces) were taken out.
The
vogue for loans originated in Australia but soon spread to the North American
mining industry. The two largest loans were by Newmont
Mining for 31.1 tonnes (1 million ounces) and Barrick
Gold for 33 tonnes (1.1 million ounces). Such loans helped push up gold lending
rates and encouraged central banks to deposit gold with the market because of
the improved return.
However, gold loans had less
appeal in the 1990s as mining companies were offered other increasingly sophisticated
financial instruments, such as forwards
and options, by the bullion
banks. Consequently the repayment of existing gold loans exceeded the drawdown
of new loans after 1991, actually putting them on the demand side of the market
balance. Even so, new loans are still taken out, for example, for the Refugio
mine in Chile, which began commercial operations in 1996. Ultimately the extent
of gold loans is very much dependent on the rate at which new projects are coming
on stream and the cost of borrowing gold relative to the cost of borrowing dollars.
In a period of low gold lease rates, the gold loan can come back more into fashion.
See also Hedging.