Further, the new emerging electronic trading platforms are fast changing thecenturies old trading practices in the precious metals trading and givingsleepless nights to bullion traders. But it is India's insatiable appetitefor gold that has become increasingly important component of overall marketliquidity and the main contributor to the structural deficit between primaryproduction and overall consumption on which gold's bulls still hang theirtattered hopes.

When the overall liquidity is drying up on a market that was once a darlingof the hedge funds and gold producers, alike. This, analysts say, is a riskof a permanent damage to any market's ability to service its customers.

Silver has reached this point of damage already; the gold market, while atno immediate risk, is heading into this risky territory.

In its latest study on the effects of the Washington Agreement - whereinsome 15 nations agreed to sell annually 400 tonnes of yellow metal, whichover five years under the agreement would not be more than 2,000 tonnes -the analysts at NM Rothschild & Sons feel that the thin liquidity in gold isperhaps the greatest threat to central banks' plans for their future goldmarket activity. Gold's falling price has attracted world concern. Anyfurther concentration in liquidity in the market deserves at least equalattention.

Gold price fall from the peak of $340.00 per troy ounce in October 1999 -after decades lowest levels of around $255 per oz just few days ago inSeptember 1999 is a big worry. Currently gold trades at around $270-levels.

As the gold enters the second year of the Washington Agreement, concerns areraised from almost all quarters.

Gold prices decline of over 20 per cent from the peak of October 1999 haseroded large portions of value from investors' portfolios, and from that ofthe central banks which hold huge chunks of the yellow metal. The impact ofimpaired liquidity in the wholesale gold markets on the central bankcommunity is three fold, NMR analysts feel.

First, the concern that the market becomes insufficiently robust to allowthe official sector's activities - typically large scale, time sensitive andcredit averse - to be conducted efficiently and without attracting unduerisk or hostile attention.

Second, the fate of some of the best brains and trading and financialengineering talents that lent the banks over the years the technical skills,banking professionalism and integrity of their counter-parties in the gold.

Gold's replacement at the commodity where the "action" is (and where bonusesare best earned), in particular by non-traditional contracts such aselectricity and band-width, will over time undermine the quality of itsmarket practitioners.

Third, most central banks now mark their gold reserves to market, to givethe world a better indication of the financial resources available tosupport their currencies, international obligations, etc. As liquiditydeteriorates, it looks increasingly out-of-step with what regulatorsencourage in similar circumstances in the financial markets.

So, there is a need for a proper basis of revaluations in the globalsecurities market and the views of the USA's Securities and ExchangeCommission's general counsel Mr Douglas Scheidt are important. Scheidtwarned saying: "the fair value of a portfolio security is the price whichthe fund might reasonably expect to receive upon its current sale". But goldholdings marked-to-market do not reflect a "reasonable expectation" ofachievable value, even at the London Fixings. As liquidity falls, in ourview, the revaluation assumptions of gold's biggest holders will beincreasingly challenged. The introduction in June 2000 of the new SFAS(Securities and Finance Accounting Standards) in the USA will further alterhedging policies and practices and further constrain hedging business. Thestandard's requirement for marking "speculative" positions (ie any positionnot tied precisely to the amount, form and deliverable location of the metalunderlying the hedge) to market and reflecting profits or losses arising inthe income statement, will direct producers away from the more exoticinstruments to vanilla products such as forwards and put options, if notdeterring them from hedging altogether.

So, what has the Washington Agreement achieved? NM Rothschild analysts feel,certainly not as much as was once hoped... And"we are not alone in wonderinghowever, whether the World Gold Council's policy, brilliant inimplementation, was not flawed in its objectives, one of which is highergold prices.

With few central banks likely to wish to buy gold in future, and given thetreatment by paid lobbyists which they can expect should they decide tosell; gold traditionally biggest client constituency, albeit a stale one -Central Banks - has thus been alienated for, we suspect, a generation. So,which way dear gold from hereafter?