Tuesday, May 18, 2010
Gold trade suffers huge losses on margin calls
Gold wholesalers unable to 'fix' their open position on price with lender banks may face financial ruin.
Close on the heels of the Damas debacle that left the Abdullah brothers, who once owned the largest jewellery group in the region, at the receiving end, a few other wholesalers, including 'one of the largest', is said to be in financial crisis.
The unabated upward streak in gold price that commenced sometime in April last year from the upwards of $850 per ounce and touched an all-time high of $1,250 on May 14, has denied many a wholesaler the opportunity to 'fix' their open position on price with their lending banks.
"This has landed these wholesalers in 'huge losses' as they have already sold the borrowed gold to their retail customers at lower prices, but failed to settle the gold loan with their banks at that time," a gold analyst explained.
The wholesalers generally borrow gold from their banks at 'unfix' – without assigning any price then – sell it to their retail clients. The wholesalers who go short on the gold usually wait for an opportune time of 'correction' to fix the price and settle the gold loan with their banks. During this period, they keep paying margins to the bank to offset any rise in price during this period.
But the last year handed out a 'double whammy' to some of the aggressive wholesalers who chose to make a quick buck by selling gold to their clients and diverting these funds to real estate during the property boom.
In their good early days, they were able to settle the loan with their banks at lower prices offered by price corrections which were amply available. Since a gold loan comes at very attractive interest rate, which is benchmarked against Libor, the wholesalers enjoyed a rather good time.
With the gold price making a steady rise, the wholesalers hardly got an opportunity to fix their position, resulting in the banks forcing them to pay the huge margins to make good the price differential. To make matters worse, while some banks downsized the gold loan facility, a few banks even called back the facility with some wholesalers.
The big blow came from the crash in real estate where some of the leading wholesalers have built up big positions. Sources said some leading names in the gold business are frantically trying to sell off their property assets.
http://www.business24-7.ae/companies-markets/commodities/gold-trade-suffers-huge-losses-on-margin-calls-2010-05-18-1.245539
Gold trade suffers huge losses on margin calls
Gold wholesalers unable to 'fix' their open position on price with lender banks may face financial ruin.
Close on the heels of the Damas debacle that left the Abdullah brothers, who once owned the largest jewellery group in the region, at the receiving end, a few other wholesalers, including 'one of the largest', is said to be in financial crisis.
The unabated upward streak in gold price that commenced sometime in April last year from the upwards of $850 per ounce and touched an all-time high of $1,250 on May 14, has denied many a wholesaler the opportunity to 'fix' their open position on price with their lending banks.
"This has landed these wholesalers in 'huge losses' as they have already sold the borrowed gold to their retail customers at lower prices, but failed to settle the gold loan with their banks at that time," a gold analyst explained.
The wholesalers generally borrow gold from their banks at 'unfix' – without assigning any price then – sell it to their retail clients. The wholesalers who go short on the gold usually wait for an opportune time of 'correction' to fix the price and settle the gold loan with their banks. During this period, they keep paying margins to the bank to offset any rise in price during this period.
But the last year handed out a 'double whammy' to some of the aggressive wholesalers who chose to make a quick buck by selling gold to their clients and diverting these funds to real estate during the property boom.
In their good early days, they were able to settle the loan with their banks at lower prices offered by price corrections which were amply available. Since a gold loan comes at very attractive interest rate, which is benchmarked against Libor, the wholesalers enjoyed a rather good time.
With the gold price making a steady rise, the wholesalers hardly got an opportunity to fix their position, resulting in the banks forcing them to pay the huge margins to make good the price differential. To make matters worse, while some banks downsized the gold loan facility, a few banks even called back the facility with some wholesalers.
The big blow came from the crash in real estate where some of the leading wholesalers have built up big positions. Sources said some leading names in the gold business are frantically trying to sell off their property assets.
http://www.business24-7.ae/companies-markets/commodities/gold-trade-suffers-huge-losses-on-margin-calls-2010-05-18-1.245539
