Gold leap sparks rush to unwind bets

APPREHENSION is building up in the gold market about the big bets taken by some banks that the bullion price would stay low. Instead, gold has soared from $278 to $320 an ounce. Traders think it will soon reach $325, the highest since autumn 1999.

This has caused a scramble to unwind bets against the price. Many of these are by big mining companies that 'hedged' their future production. One of the biggest players, Ghana's Ashanti, has been struggling for years after running up hefty losses on hedging. More recently, other gold companies, such as South Africa's Durban Deep, raised new equity to help unwind their selling bets.

The miners have future gold production coming through to offset any selling commitments. US investment banks, including JP Morgan and Goldman Sachs, were active in the gold market. US commercial banks have held big derivative positions. If any of these banks took big bets on the gold price staying low, they would be doing so without future metal production to fall back on.

One leading expert said: 'The potential for a squeeze is huge.' Some say that a rise to $330 would trigger more 'margin calls', forcing gold bears to put up more funds. Such warnings have been heard before, but the gold market, though global, is relatively small and can easily be swamped by huge derivative trades. Some estimate the 'short' position at 1,500 to 3,000 tonnes - six months' to a year's output.

With the dollar under fire and India-Pakistan war fears, everything seems to be running gold's way at the moment. It finished at $320.15 in London on Monday night, having earlier hit $320.80.