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  • p80
  • 2 Comments

  Oct 12 07:15 AM
  Who is short gold? The gold miners have sold forward gold as a requirement for project financing. Are they going to buy it back? Most who are allowed to buy it back already have. See the decline in the global hedge book. Is anyone else short gold? No, not for any long term reason, it is too volatile to be a carry trade.
  Why are lease rates high? The lease rate is the US LIBOR minus the gold forward. Libor is crazy volatile and unrepresentative of the real USD deposit market at the moment because of the turbulence and uncertainty of current financial markets. In particular the variance between overnight fed funds, overnight LIBOR and 1, 2 and 3 month LIBOR. The gold forward is also crazy volatile and bid offer spreads have widened from 10 bp to 50 bp. The gold forwards in the 1 month term are representative of where gold traders actually finance themselves. So the gold forward is moving with the short term finance rate. The divergence between the short term finance rate (overnight USD) and the medium term finance rate (1, 2, and 3 month LIBOR) is showing up in the theoretical gold lease rate. When the 3 month LIBOR rate comes back in line with the fed funds rate the gold lease rate will fall back to zero. Look at the gold forward 1mth is 2.50/3.0%, what is over night USD rate, 1.75%. so on that basis the gold lease is negative. But on the 1mth Libor basis, where 1mth Libor is 4.50%, then the gold lease is 1.50/2.00%... does that mean anything about gold potential to rally. No, the most likely thing is the gold miners panic because all other commodity prices have collapsed and the potential for the gold price to fall is becoming more real, so you might find the gold miners sell their potential future production and push the gold price back down to long term average levels, to do this the gold miners have to borrow gold, so they will push the gold lease up even further, but will it be in the 1mth? No it will be in the 2 and 3 year lease rate.

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  • Alan Brochstein
  • 301 Comments
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  Oct 12 09:20 AM
  Thanks for sharing this information, but I believe you are drawing an improper conclusion. In times of crisis, it isn't surprising that the lease rate would jump. Your chart shows three other periods - during the LTCM and Asian meltdown in 1998, pre-Millenium in 1999 and after the 9/11 attacks. Gold didn't do much around the spike in 1998 but then moved down over the next year. It spiked in the 2nd half of 1999 but then faded for quite some time. Of course, it began a stead ascent beginning in early 2001 as the whole commodity cycle turned (and stocks rolled over and the Fed began easing from very high levels). The gold response in late 2001 was a very brief surge and then a pullback to the trend that was already in place. If anything, I would say that very short-term spikes in the lease rate tend to be associated with short-term spikes, not major moves. Gold has spiked of late, rising from 750 or so to above 900 during this financial upheaval.
  
  The comment above mentions the spike in Libor, and that resonates with me as a potential explanatory factor. Before I read his comment, the thought, which p80 expressed so much better than I would have, entered my mind. By the way, the fall in gold preceded the turn in the dollar significantly. Gold peaked early in the year, while the dollar actually continued to erode. I believe that the dollar was valued at 1.52-1.54 in early March as gold was ringing the $1000 bell (that brought in supply in the form of people all around the world melting their gold). While oil continued to rise from the levels of just above $100, gold did nothing over the next few months. The euro continued to appreciate, peaking in July at 1.60ish concurrent with oil near 150. In other words, gold peaked 4 months early and flat-lined while the dollar weakened further and oil increased 40+%. Maybe oil is the new gold...

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  • Facts
  • 3 Comments

  Oct 12 09:42 AM
  It is incorrect to say Gold Lease rates are due to Libor. Lease rates are an independently derived parameter. It is the Gold Forward rate that depends on Libor and Lease rates.
  
  The reason Gold futures aren't in backwardation right now is due to high Libor rates. The Gold carry trade still generates a positive return.
  
  Lets look at a 3 month term:
  
  Libor = 4.8
  Gold Lease = 2.5
  Gold Forward rate = Libor - Lease = 2.3
  
  So you make 2.3% in 3 months being short Gold assuming Gold prices remain unchanged. The Futures contracts reflect this pretty closely.

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  • Alan Brochstein
  • 301 Comments
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  Oct 12 10:23 AM
  I am not sure if you were addressing me or p80, but, the way I was interpreting p80's argument is that the spike in Libor is the potential reason for the spike in the lease rate. I am not trying to imply that there isn't a positive carry. If libor were "normal" now, it wouldn't be 4.8, it would be closer to 2 or so.

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  • paultaut
  • 1111 Comments

  Oct 12 11:33 AM
  When the world is collapsing around you, people tend to run where they can. Gold has had some value for thousands of years, Fiat or paper money has been around for hundreds. But it has only been in the last 50 that all paper currencies are no longer tied to either gold or silver.
  
  Neither of them can be created willnilly as is the Case of the Dollar currently. When the chickens come home to roost, they will find a burning hen house. The world is awash in dollars, more so every day. All it will take is a few small emerging market nations to sell their dollar reserves to bolster the purchasing power of their own currencies ie. prevent inflation.
  
  

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  • xxconfidentialxx
  • 2 Comments

  Oct 12 01:31 PM
  this is a garbage comment. while i agree that it is questionable that gold lease rates are not necessarily indicative of increased demand for gold at the moment, it is clear that a point has been missed.
  
  it is not gold producers who are holding positions on the COMEX
  and gold production costs are largely imbedded and coming down it is probable that there is an opportunity for producers to earn significatly increase margins as well.
  
  What is clear, is unlike what a forward or future market is supposed to be, the COMEX is not reflective of reality on the physical demand side of precious metals. Unhedged, wholesale bullion is not being sold anywhere near COMEX financial prices and in most cases, much higher.
  
  It is not the lease rate that matters, it is the spread dealers are asking for that matters on physical gold.
  
  give your head a shake
  
  A vey nice attempt to end run reality however.

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  • User 50674
  • 6 Comments

  Oct 12 01:38 PM
  I am not an economist or anything even remotely related to such professionals. However, one thing which I cannot understand is why would the commodity prices (including Gold) will fall in the long run when every country has decided to print more currency and flood the banks with more currency. At some stage this currecncy will be in the hands of people who will use it to pay higher prices for the same goods we buy now, inflation will have to be high and under those conditions, all commodities will have to be high as well. Can someone explain why there can be deflation and falling commodities when trillions of dollars (and euros and pounds) will flood the system with paper money.

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  • Maven
  • 9 Comments

  Oct 12 02:18 PM
  Some say that the wholesale deleveraging/capital destruction going on now is actually decreasing the money supply, even as nations are flooding the world with new "money." This might explain some of the unusual things happening with asset/commodity prices.

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  • cheapybob
  • 22 Comments

  Oct 12 03:10 PM
  I think the Central Banks have signaled that the suppression of gold prices is no longer their top priority. I don't expect we'll see gold sales from them as was done in the past because that would put them in a position of increasing their dollar reserves. I've also read recently that they are both not leasing out more gold, and refusing to roll older leases. Much of the supply in recent years has been from those leases and gold sales. Now the supply will be what the miners produce, which is a lot less. That explains the shortage of physical gold. As for why the price of paper gold is dropping, I thing its due to the deleveraging going on. Eventually, I think the price will rise to reflect supply and demand.

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  • Eddie Beer
  • 2 Comments

  Oct 12 03:30 PM
  This one is for user 50674.
  The way I see it, at this time most investors are fleeing all markets and are heading into cash and government bonds/treasuries because in their belief system safety and value lies there. There is a lag time between all the debt paper being pumped into the system by the central banks and that liquidity showing up as inflation. ( Because of this the fed can get away with confusing the masses with CPI and other bogus indicators that do not show the true state and cause of inflation). Also most of that value sold down from ( in some cases) very valuable assets gets wiped out as it travels from stocks to bonds which then are devalued by inflation.
  
  Because of clever manipulations of gold swaps and leases and other paper games and in some cases even outright sales of physical gold by governments that are desperately trying to keep the right to print money, most people are unaware or still not convinced of the value of the precious metals and don't consider paper to be just that paper... yet.
  
  As investors sell all stocks/commodities and buy government promises it makes companies that sell those stocks/commodities weaker (deflation) and pumps up the value of the currencies in which the investors park the proceeds of their sales (inflation). This causes the price of the sold stocks/commodities to fall and the currencies to get stronger. The dollar and euro etc. bubbles just got fantasticaly bigger. As in trillions.
  
  This crisis will go a long way to show those that have eyes to see which way the wind blows. Personally, I believe that while this crisis will be drawn out and brutal, it will be papered over and a seeming state of normalcy will return. A warning for those that are aware. When all that paper finally does catch fire it will be a true 'bonfire of the vanities'. I'm sticking to things real where and as much as I can. Best of luck!!
  
  

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  • secmaven
  • 178 Comments

  Oct 12 04:27 PM
  There can be no real shortage of physical gold. All one has to do is to buy the requisite number of shares of GLD and redeem them for delivery of gold at the vaults.
  
  

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  • Spenser
  • 1 Comment

  Oct 12 05:57 PM
  And the requisite number of share of GLD would be......? The answer is, a LOT more than almost anyone can afford.

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  • leonid breshnev
  • 9 Comments

  Oct 12 06:18 PM
  what happens to the value of my shares ,stocks bank deposits if the meltdown happens as it is now quite possible or even imminent.what about government default.ie iceland,possible.?gold in your safe worth nothing.possible?answe... on a postcard please

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  • p80
  • 2 Comments

  Oct 12 06:31 PM
  I am not saying there is no carry in being short gold. There is a carry. But really think about it, 1 week implied volatility at 50%, meaning roughly 3.3% movement in the price per day and you want to be short gold to try get 2.3% per year? Or 0.006% per day. Nuts! As if any punter in their right mind would think that is a good trade ever!
  Gold lease is not independently derived. People trade the gold forward, the gold lease is implied. The gold forward trades in the market, OTC swap market, or COMEX, they are more or less the same rate, save for bid offer and the London to New York spread. However, every one faces a different USD rate. Good luck trying to trade at LIBOR. However, if you can trade at LIBOR then the gold lease is LIBOR – Gold Forward. But if you’re actually USD funding rate is something different from LIBOR then the gold lease = your USD funding rate % A/360 – the Gold forward % A/360. At the moment the discrepancy between USD funding rates between different punters in the market is massive and very volatile. You also have to remember that the GOFO fixing is a bid rate, the offer is much higher. Gold forward bid offer spreads are about 50bp between banks, customers are seeing more like 1% bid offer on the forwards. So when you have GOFO fixing bid, with massive bid offer spreads, and you have LIBOR as an offer rate, where LIBOR rates are volatile and spreads are wide too, then naturally you will get what looks like a massive high lease rate. Lease rates are high, but not that high. Depends, if you want to borrow it then its high, if you want to lend it then its low.
  However, it is true, there is unprecedented physical demand for gold at the moment, which is putting a little bit of a squeeze on the front end lease rates, but nothing silly. Overnight gold and tom next gold swaps are still trading around USD cash rates most days.
  It is also true, central banks are lending less, and some CBs are not renewing their deposits. This is not some conspiracy, it’s because they are not comfortable in the current environment with lending unsecured gold for any term to banks over which they have no legislative power. They will lend it again when things calm down and they want to try generating a return on their otherwise expensive gold to keep in vaults. In the mean time everyone who is buying gold on forward contracts is implicitly lending it. It just takes a bit of time for gold to be moved around between the different systems, eventually there is enough for the people who want it, since most of the gold that has ever been dug out of the ground is still around in vaults gathering dust.
  Central banks stopping or reducing gold sales? Not likely. Might slow down a bit, but don’t think there will be a large fundamental change in their sales programs. There may even be increases to finance this massive bail out! And central banks selling gold doesn’t increase their USD reserves. They just switch to whatever currency they want to hold it in. Sell gold get USD, sell USD get EURs, or JPY or AUD or whatever.
  Why are commodity prices falling, because inflated prices have encouraged a massive increase in production which is coming on stream at a time when global growth in demand for commodities is expected to slow. Plus all the leveraged commodity longs are getting margined called and stopped out, like silver on Friday night! Ooops, wonder who that was selling it down 20% after the close.
  Why is the physical gold priced different from comex or the London spot market? Because physical dealers can get away with charging massive premiums because so many punters are prepared to pay the premium because they don’t really know where the price of gold is, especially when it has 100$ range like on Friday...
  enjoy
  

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  • The Sane Investor
  • 9 Comments
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  Oct 12 09:05 PM
  Interesting article, although there are a couple of things that don´t make sense.
  
  (1) In a financial crisis and recession, shorting gold for financing represents an almost exponential amount of risk, since you´re shorting something that performs very well (theoretically) in a recession because it´s a store of value. Also, you would typically use this financing to buy much higher yielding debt, and during a financial crisis the risk of this debt defaulting goes up. Thus, you have gold going up in value and the value of your bond going down if things get worse, and that represents a very large amount of risk, since you could theoretically be out an infinite amount of money if gold went up in value an infinite amount (that would never happen, but it´s what could happen theoretically).
  
  (2) The yen has been going up in value since people have been exiting carry trade investments made from japanese debt to reduce their overall risk exposure. Although the interest rate is higher on japanese debt than the lease rate of gold, you could only lose a finite amount of money, since you´re limited by the terms of your contractual obligation (you can only lose the value of the investment plus the super low interest rate if your carry trade investment defaulted). Thus, the risk is much higher with a gold carry trade at this point than with japanese debt. If people are trying to lower there risk by exiting japanese carry trades, shouldn´t they be falling over themselves to exit gold carry trades?
  
  (3) A gold carry trade would really only make a lot of sense during a bull market, since the value of gold would be expected to go down and the market rate for bond yields would be higher as more people would be pouring their money in to equity investments. Thus, you could make a lot of money if the value of gold went down while you were leasing it, the lease rate stayed at 0.25%, and the yield on the bond you had was pretty high.
  
  (4) You mention: ´Without the paper gold carry trade, you could argue that gold would be a few thousand dollars higher right now.´ This trully doesn´t make any sense, because if that was the case, what´s to keep someone from buying a future and holding on to it for delivery? You could then buy that gold at $850 an ounce, and sell it at $3,000 an ounce (according to your statement). That represents over a 200% return. Don´t you think if that was the case more people would be doing that? Hedge funds could make a quarter on trades like that. It´s called arbitrage, and experience indicates that if people can make money from doing nothing, they will.

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  • bearfund
  • 506 Comments

  Oct 13 12:46 AM
  leonid, there is very little chance that physical gold in your safe will ever be worth nothing, no matter what happens. About the only way that could happen is if there were an agricultural crisis of such enormity that farms were unable to produce any excess supply of food (i.e., all farms become subsistence farms). Since the basis of all trade is excess food production, there would be no food to trade and no one would be able to divert any energy to any activity other than food production for himself. Gold would be worthless as there would be no goods or services of any kind available for sale at any price, therefore no need for a medium of exchange or store of value such as gold.
  
  While this scenario is certainly possible, there is no reason to think it could come to pass any time soon, and even less reason to believe a financial meltdown could trigger it. So I think you're safe here. A greater danger is that the effective value of gold (i.e., what goods and services you can exchange it for) declines due to government confiscation. Since keeping or trading gold would be a crime, many people would be unwilling to accept it. The real value of gold would not be affected (i.e., in other countries it would buy the same goods and services it always has) but you would not be able to capture that value.

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  • paultaut
  • 1111 Comments

  Oct 13 01:12 AM
  Paper currencies are not totally worthless, there is the worth of the paper itself to consider.
  
  In the 1920s, the Printing presses went to work in Germany in an attempt to jump start their economy in the aftermath of WW1. All it led to was Hyperinflation.
  
  I really don't see a big difference as the Printing presses go into overdrive in the Developed world to prevent a monetary crisis.
  
  Think about it, we rapidly increase the amount of money to stabilize money. If gold could be created the same way, it wouldn't be worth much in the Future.
  
  When you talk about ETFs for Gold, you are talking about paper certificates issued by a corporation. Is the actual physical bullion really there? Why does anyone believe that this corporation is different from others who have hidden material facts.
  
  My wife gets an article of jewelry every once in a while. Either gold or white gold (as a silver lookalike). She gives me a gold ring once in a while, preferably with Gold Coral in the mount, 18ct. is the ideal.
  
  She likes the Jewelry aspect, I like the investment aspect.

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  • Someone1111
  • 1 Comment

  Oct 13 05:08 AM
  The reality is we are seeing currency and credit DEFLATION.
  The central banks can ‘print’ as much money as they want, but when no one will borrow/take it and loan it into circulation it doesn't matter… You can't get fiat money into circulation any other way.
  Money and credit are being destroyed at a faster pace then the central banks can push new money back into the system.
  I do believe that they will eventually try to peg the world currencies back on the gold standard (because they will have to for anyone to trust ‘money’) but until then you will want to be in a deflating fiat currency.
  I expect gold to fall to at least $200 before that happens.
  
  

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  • Whidbey
  • 771 Comments

  Oct 13 11:59 AM
  Gold is wonderful because it keeps the fiat money men attentive to what they do. But it is useless since the fiat money men can not make gold (yet), they must be mindful of gold as store of value. Today we know the "we can print our way out of this" crowd is calling for more paper. But the world knows that paper is no store of value, to the contrary, it is the illusion of value.
  
  The post is likely a close approach to the way events unfold if you skip the wild story of a dark pool short, and it suggests that gold gets more valuable over time. That is highly probable and that is the message.

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  • Richard Fields
  • 2 Comments

  Oct 13 12:21 PM
  Exactly who are the "bullion banks"? What are their names?

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  • Richard Fields
  • 2 Comments

  Oct 13 12:22 PM
  Exactly who are the bullion banks? Can someone identify them by name?

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  • The Sane Investor
  • 9 Comments
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  Oct 13 12:35 PM
  I was thinking about it last night, and the concerns that I presented in statements (1) and (2) above could be compensated for if the person using gold as a carry trade were to sell gold on the spot market and then buy one month gold futures. However, if anything this would make it such that the spot price of gold would be much lower than the paper value of gold. This seems to directly conflict with your argument that the gold carry trade is lowering the paper value of gold.

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  • v8hemihead
  • 4 Comments

  Oct 13 01:51 PM
  Question: Why does my uncle sam collect taxes? Can't he just print money when he wants something? Come to think of it, isn't that what he has been doing for at least a year now? Hey, we're broke, let's have a party! Send everyone a check! The last party was so darn much fun, let's do it again! Avoid hangeovers - stay drunk! Anyone want to unload some gold and silver, I've got this really awesome greenish paper! The world loves it! It's, it's, its . . . almighty! Hail the $! HA! I've known the $ was toast for 2 years now, there was a spark of hope B4 that. All common sense is out the window. The only part I didn't realize is it is taking the pound, the aussie, the euro, and others with it! Awesome! What a great time to be alive! Excitement is in the air, blood will be in the streets! Praise Jesus and pass the ammo!

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  • theaphelion
  • 1 Comment

  Oct 13 05:46 PM
  How can you guys say Gold has no value? True value is the time that it takes man to produce an item. It doesn't matter if it is building a bridge or a wall or mining an ounce of Gold. You will not produce an item at a loss!
  It is expensive to sink a mine shaft, it is expensive to dig out gold, it is expensive to crush the ore, it is expensive to extract the Gold, it is expensive to treat the waist and rehabilitate the ground. Many man hours involved. This cost my friends is the inherent value in Gold, the break even cost of the mine. If this cost is not recovered the mine is closed. Less mines results in less gold whereby, supply and demand keeps the price above this cost level. That is the value of physical gold my friends.
  Paper gold and fiat currencies without substance are pie in the sky, essoterical ideas and dreams. They can carry on producing them untill the value is zero! Not gold my friends, man hours ensure inherent value!
  The sub prime market and the discounting of paper loans with gearing being laid off like a book maker lays off a bad debt at the races is bound to come to naught. There is no fundamental value (very little man hours to produce paper) and we all know that there are no free lunches. Central banks are starting to realize this and the sub prime debacle has proved this. The next bubble to burst is when the short holders of gold start to run for cover and there is insufficient or a shortage of the physical metal. A small amount of Gold gets used in industry a fairly large amount in jewelry which is usually kept and not scrapped. The Chindra syndrome my friends is ensuring an ever increasing amount of jewelry is taken from the gold supply as these countries become more wealthy. The exchange traded funds who are taking an ever increasing amount of Gold from the market makes the supply even shorter. They have to by law ensure that physical gold is stored in the vaults to cover the fund sales. I ask you, would you rather have $840 or an ounce of gold right now? The inherent value of the cost of producing that ounce ensures through supply and demand that it will always be worth those man hours that are spent in producing it.
  
  Regards
  
  Theaphelion
  

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  • Keer-eh Khar
  • 39 Comments

  Oct 13 06:10 PM
  Gold elevator up will by-pass Dow Jones elevator down at 3000...

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  • Bron
  • 40 Comments
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  Oct 14 12:46 AM
  See www.lbma.org.uk/assocn... for some bullion banks.
  
  I expected better analysis from fatprophets, given they have been bullish on gold for a long time.
  
  Lease rates or foward rates, which drives which, doesn't matter they are both sides of the same (gold) coin.

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  • Russian Bull
  • 15 Comments
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  Oct 14 10:24 AM
  I think it's cheap insurance right now. Why not buy 5 ounces, 'just in case'.
  
  Besides, you can always show it off to your date. Drop an ounce of gold into a girl's hand and watch her eyes light up. Cheap thrills, yes, I know, but it beats the hell out hiding in your basement, eating MREs and waiting for the world to end.

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  • Keer-eh Khar
  • 39 Comments

  Oct 14 12:42 PM
  Gold elevator up will pass by Dow Jones Industrial Average elevator down at 3000...

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  • CLH
  • 618 Comments

  Oct 14 02:07 PM
  Someone1111 (see above)--He explains why hyperinflation or any kind of inflation is not possible during a credit collapse. Buying gold now makes no sense. Its interesting how false information during time of panic is given out and believed by so many. Gold will continue to fall as the dollar becomes more valuable.

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  • Chris B
  • 357 Comments

  Oct 14 02:32 PM
  The gold in your safe probably won't be worthless - but it could go to $200 per ounce. Both currencies and gold have lost that kind of value at various points in history. Consider the early 80's for an example of what could happen to your gold investment. Don't think of it as safe, and don't expect it to rise forever and pay for your retirement, kids college, or lifestyle. Buying into an ideology could cost your family a lot and be a permanent financial setback.
  
  Regarding the argument by theaphelion that the value of gold is set by the cost of extracting it - was it any cheaper to extract gold in 1984 than it was in 1981? If I drill an oil well and my cost of production is $100/barrel does that mean oil is automatically worth $100/barrel? The markets disagree, and marginal production facilities are shut down and restarted all the time in response to price fluctuations. Their added supply shortly after price increases is part of what pushes prices back down.

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  • huskerbob
  • 53 Comments

  Oct 14 07:08 PM
  "Buying into an ideology could cost your family a lot and be a permanent financial setback." Like buying a house because prices always go up? Like investing in the the stock market for the same reason? Like throwing billions into CDO's and subprime?
  Gold has done its job as a store of value, keeping up with inflation. Most physical gold buying is not spurred by speculation (futures are preferred for that purpose) but because people recognize that property of gold. Gold can go down, but not to the extent that, say, a share of Lehman Bros or a paper dollar can. The value of a dollar has declined 97% in less than 100 years. Unlimited dollars are now being made available. Is that a desireable quality in a store of value? Jim Rogers has seen it all before and says that we are creating "a hyperinflationary holocaust".

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  • silkwood
  • 1 Comment

  Oct 14 08:44 PM
  to CLH, Someone 1111
  Getting back to my school economics,
  Price x Quantity of goods = Money in circulation x Velocity, well tested and proven in Zimbabwe etc.
  In most of the world economy at present velocity is very low with constipated banking sector hoarding to meet unknown CDS liabilities etc, but M is increasing by the trillions very quickly as money is printed.
  When V resumes, and if Q stays the same [ or in fact reduces as producers go out of business ] seems to me P has to race away, soon, THEN look out for hyperinflation, and buy gold.

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  • Berto
  • 1 Comment
  • My Website

  Oct 14 10:28 PM
  Buying gold is a great idea, but not everyone knows the best ways to own it. It’s not safe to own too much under the mattress, so I wrote this article that gives you some options:
  
  www.mikeroberto.com/20.../
  
  Please add any thoughts or comments.
  Berto
  
  (PS - I have a personal feeling that it will dip a bit when it gets sold off as people/funds dig for cash, and think low $700s will be the next entry point. But who knows, I’ve been wrong before!)

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  • Keer-eh Khar
  • 39 Comments

  Oct 14 11:01 PM
  Gold elevator up will by-pass Dow Jones elevator down at 3000...
  
  Gold elevator up will by-pass Dow Jones elevator down at 3000...
  
  Gold elevator up will by-pass Dow Jones elevator down at 3000...

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  • Chris B
  • 357 Comments

  Oct 15 10:20 AM
  "Like buying a house because prices always go up? Like investing in the the stock market for the same reason? Like throwing billions into CDO's and subprime? "
  
  Exactl