Gold Lease Rate Spike

Gold lease rates spiking. Signal for higher gold prices.

 

GOFO Rates Vs. Gold Price

Koos Janssen points out that when GOFO rates turn negative, the gold price is pushed up due to tight supply in gold.

I have compiled the 3 month GOFO rate since 2008, calculated from lease rates and libor rates. You will notice that the GOFO rate is quickly turning negative and this tells me that the gold price is probably nearing a bottom rather than a top.

Backwardation in Gold: GOFO = LIBOR - GLR

Gold Forward Rate GOFO = LIBOR - Gold Lease Rate GLR.

This is stated as a percentage, and is almost always positive, meaning the gold price for future delivery of gold is higher than the current spot price. If the GOFO is negative, this means that it is cheaper to borrow against gold than dollars, and is very unusual. Generally speaking, it should be cheaper to borrow dollars for just dollars, without involving another commodity, however the GOFO has turned negative on several occasions in the past due to periods of high physical demand.

So what is the status today?

Gold Lease Rates are negative -2% and we even had spikes to -4%.

LIBOR rates are close to zero. 3 month LIBOR is at 0.3%.

That makes GOFO = 0.3% - (-2%) = 2.3%

GOFO is now almost in backwardation and that should tell us that there is a looming physical shortage.

GOFO reporting has officially ended

So this is it... one thing less to worry about.

LBMA to stop reporting GOFO rates from February 2015 onwards

In September I reported that the LBMA could stop reporting the GOFO rates.

Well, we got notice that LBMA will stop reporting the GOFO rates from February 2015 onwards. The reason being that gold swaps are out of fashion these days, who wants to borrow gold?

This will give a green sign for all the gold manipulators.

GOFO rates hit record lows

Just to remind you that GOFO rates are sinking fast. I expect a V-bottom reversal in the price of gold. That's a 14 year low in GOFO. Another catalyst is the Swiss gold initiative which will boost gold to $1350/ounce if it passes end this month (as Bank of America Merrill Lynch says).

1 month GOFO:

6 month GOFO rolling over:

A lot of stress building up in physical gold when you look at lease rates. Look how the different maturities now converge together. This typically is a sign of a bottom.

LBMA Might Stop Reporting GOFO Rates

In a shocking report on Reuters, LBMA Chairman David Gornall said last month that the 150-member trade body could stop providing GOFO rates if stiffer new regulation makes it too expensive to run.

The Gold Forward Offered Rate (GOFO), the equivalent of LIBOR for the gold market, is used as a benchmark for dealers, central banks and others to swap gold for U.S. dollars with miners who may need gold to meet contracts or investors for short-selling and other purposes.
The LBMA already stopped reporting silver forward rates in November 2012 and are now contemplating if they shouldn't stop reporting the gold forward rates. You can see on the chart below from Kitco what happened to the silver lease rates at that time. The same outcome is expected now for the GOFO rates which are now reported on a daily basis at the LBMA here. The LBMA currently sets GOFO each day by polling its eight major bank dealers on the rates at which they are prepared to lend gold. This could be ending and will make the obvious gold manipulation less transparent for us to spot out.

Continue to read here.

Correlation: GOFO rate Vs. Gold Price

For some time I have daily checked the GOFO rates on the LBMA website.

It seems that whenever the GOFO rates go up (and they release it at 12:00 PM Belgian time), then the gold price goes up when the U.S. stock market opens.

See how the GOFO rate and gold price correlate to each other.

1 Month GOFO

GLD: gold price

So technically you can predict the price swing in gold by just watching the LBMA GOFO rate before the U.S. stock market opens.

Gold Backwardation Gets More Extreme

Today, the gold backwardation went into an extreme. The 12 month GOFO rate went to 0.06, a new historic low. At this rate we will be in backwardation on the 1 year GOFO rate in a few days. The fundamentals get better and better. Also the gold premiums are rising again on APMEX. And I can't imagine what will happen when the Russian situation escalates. And don't forget that the yuan is collapsing to new lows as we speak. Japan has the highest inflation in a decade. Unemployment in Europe is hitting new highs. Stock market bubble in U.S. is about to collapse. Etc...

GOFO

Run on GLD Starting at Decade Low GOFO Rates

It is very odd that Shanghai demand is now receding.

Today the SGE withdrawals of gold fell again 16% from last week to only 21.4615 tonnes, see chart below courtesy of Koos Jansen: In gold we trust. So demand for gold in China is really dropping fast as premiums between China and London are still at zero, indicating that demand for gold from China is very unnaturally low.

However, the GLD ETF had something interesting to tell. The GLD physical stock finally started dropping hard since yesterday, while I had thought it would start increasing.

GOFO rates are now very negative historically hitting new lows. Maybe this tells us that GLD is finally having a run on gold due to supply tightness. Because China isn't buying, so who is actually taking delivery from GLD now? Maybe the retail investors themselves, demanding for the physical. I'm just guessing around, could also just be storage fee payments.

Long Term GOFO Rate Hits New Low

If you really think that gold is going to crash, I need to point out one thing and that's the GOFO rate.

Recently, the 12 month GOFO rate has hit a new low we have never seen since 1989.

Let's zoom in to 2009-2014: We have a new solid low here.

So not only the short term GOFO rates (1 month to 3 months) are negative now, also the long term GOFO rates are hitting new lows. So there is a tremendous stress building in the gold market. Historically negative GOFO rates are bottoms in the gold price.

This makes me very bullish in gold at this moment. Because gold lease rates are now much higher than the interest rates/bond yields. This indicates to me that the bond market is about to collapse, bond yields will be going higher, because gold lease rates cannot be higher than the corresponding bond yields. Either bond yields will be going up, or gold has to go up. It's one of the two.

On another note, we see that the Federal Reserve tapering, is actually just talk. Because some entity is buying U.S. bonds via Belgium at a rate of 30-40 billion USD a month, which is exactly how much tapering we have had. The Federal Reserve is throwing sand in our eyes, don't be fooled. They are propping up the U.S. bond market, artificially lowering the bond yields below the gold lease rates.

U.S. debt held by Belgium (Billion USD)

Gold Backwardation Explained By James Turk

If you want to know what gold backwardation means, read this article of James Turk. Very interesting.

Let's say we have two currencies A (euro) and B (USD). Then the following is true:

- A's interest rate < B's interest rate
- A is in contango against B
- A's value rises going into the future
- Higher interest rates means a higher risk of debasement of the currency.


Now let's look at two other currencies A (USD) and B (gold):

- USD's interest rate < gold's interest rate (lease rate)
- USD is in contango against gold (or gold is in backwardation)
- USD's value rises going into the future (or gold's value declines going into the future = negative GOFO)
- Higher interest rates means a higher risk of debasement of the currency.

Now gold's interest rate is higher than the USD's interest rate. Which means gold has a higher risk of debasement than the USD. This is virtually impossible because gold cannot be debased.

Which means something has to give. This is a rare event and will mark a bottom in the gold price.

Red Alert: Gold Forward Rates Turn Negative

As I told before, the only parameter that is going to dictate gold lease rates, is the GOFO rate, because the Federal Reserve will always keep the fed funds rate at zero, which means the LIBOR rate will stay at zero. 

The GOFO rate though, is dependant on the demand and supply mechanics of gold. And today we have the first time that the GOFO rate actually turned negative, which is officially a backwardation in gold. Since the 2008 crisis hit us, the GOFO rate has never been negative, so this is a premiere. As a matter of fact, we have never seen a negative GOFO rate in a decade or more. (except for those few days in 2008 which are ignorable)

Once such events happen, we will see a huge shortage coming in gold.

Chart 1: LBMA GOFO rate turns negative

And the subsequent rise in lease rates:

Bitcoin Hits All Time High

Just to remind you that the bitcoin price has hit new all time highs at $35.

Chart 1: Bitcoin Price

With the high correlation between bitcoin and gold, there is no way that gold won't go higher.

Chart 2: Gold Price

As a matter of fact, Shanghai silver premiums hit a high of 4.36% today.

Chart 3: Shanghai Silver Premium

And even better, lease rates are hitting new highs.

Chart 4: Gold Lease Rate

While stress is still building up with record low GOFO rates.

Chart 5: Gold Forward Rate

People say I try to time the market, I say knowledge is power.

Tightness Continues in the Precious Metals Market

There are several indicators of a tight gold market right now and I want to show you this in the following analysis. I will talk about the GOFO rate, premiums, supply and demand, CFTC report.

Investors shouldn't worry about the gold price declining, this is a healthy consolidation phase we are entering in now. Of course, we hear about George Soros lightening up his gold positions, Jim Rogers starting to hedge the gold price and Dennis Gartman shorting gold, but I see that more as a contrarian indicator. In the long term, fundamentals will win the battle.

LIBOR scandal and the Significance of it on gold & silver lease rates

Following the LIBOR scandal we need to take a look at gold and silver lease rates, because lease rates are calculated as LIBOR - GOFO (London Interbank Offered Rate - Gold Forward Offered rate).

The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. GOFO is the interest we need to pay if we swap gold for U.S. dollars. Whenever GOFO goes down (or gold lease rates go up), it means people are craving to get their hands on gold. At the same time, when LIBOR goes up (or gold lease rates go up), it basically means the same: higher gold prices to come.

To read the effect of LIBOR on the gold lease rate in more detail, go to: LIBOR scandal and its effects on gold and silver lease rates.