Traders said the jump reflects the fact that central banks – mostly European – have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not repay their bullion loans if they are engulfed by the financial crisis.

“A number of central banks have been cutting back on their gold lending,” said Tom Kendall, a precious metals strategist at Mitsubishi in London.

John Reade, a commodities strategist at UBS, added that there had been a lot of talk about some central banks being unwilling to lend their gold because of a redoubled focus on the risk of borrowers not returning it.

This is a huge turning point. Leasing has capped the gold price whenever it threatened to rise, for well over a decade. The risk of counterparty default was totally ignored in what should be an illegal scheme perpetrated on the public. But anyway, without this backstop (which may not be fully removed yet), there is no practical limit to the price. Things should get very interesting.

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