Where have we seen gold lease rates spike up like this before?
Right, during the July 2013 bottom.
Gold lease rate spikes
Lease
Gold Lease Rates Topping Out
Very curious correlation.
As you know:
Lease Rate = LIBOR – GOFO
And a negative GOFO means there is stress in the gold market. A negative GOFO means that the Lease Rate is high. So stress in the gold market is associated with a high lease rate.
Whenever the gold price goes up though, the stress in the gold market will go away and the lease rate will go down.
Lately I see that the GOFO rates are turning positive and rising again, which makes the lease rate go down. The gold lease rate is topping out.
If we look at history, we will at least see a $2000/ounce gold price somewhere in the next two years if lease rates go back to the 2012 lows.
Gold Lease Rate Higher, Registered COMEX Gold Lower
Just another update.
Gold Lease Rates are at an all time high again:
| Chart 1: Gold Lease Rate |
COMEX registered gold has once declined to even lower levels. J.P. Morgan unloaded its registered gold. Total registered gold at COMEX now stands at: 875713 troy ounces. We are nearing the bottom.
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| Chart 2: COMEX gold |
Gold Lease Rate
This page is created to monitor the “Gold Lease Rate”.
The gold interest rate earned on fiat gold is commonly referred as the gold “lease” rate.
It is calculated as:
Gold Lease Rate = Libor Rate – Gold Forward Rate.
The LBMA presents the data every day at this link.
Whenever the gold lease rate tops out (spikes upwards), the gold price will hit a bottom as central banks demand the gold back from the bullion banks at higher gold lease rates. So it is a bullish sign to have high gold lease rates. It means that the GOFO rate is very low, which indicates backwardation in gold.
Red Alert in Gold Lease Rates
I have become very bullish lately on silver and was already bullish on gold.
But the following chart makes me ultimately bullish. We see the biggest increase in gold lease rates as of yesterday and we have seen this before. In 2008, the gold lease rates started to spike upwards, which meant gold was in short supply. It also meant that the “interest” to hold gold was going up, just like the “interest” on your cash is going up.
This ultimately means that the world is valuing gold at a higher interest rate and the central banks are demanding their gold back from the bullion banks.
We are in for a huge upside move if you ask me.
Bitcoin Hits All Time High
Just to remind you that the bitcoin price has hit new all time highs at $35.
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| Chart 1: Bitcoin Price |
With the high correlation between bitcoin and gold, there is no way that gold won’t go higher.
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| Chart 2: Gold Price |
As a matter of fact, Shanghai silver premiums hit a high of 4.36% today.
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| Chart 3: Shanghai Silver Premium |
And even better, lease rates are hitting new highs.
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| Chart 4: Gold Lease Rate |
While stress is still building up with record low GOFO rates.
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| 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.
Why are the silver lease rates flat at Kitco?
At last we know the reason why the lease rates for silver were flat for so long (and still are). James Turk told us just recently that the LBMA (London Bullion Market Association) is no longer reporting silver interest rates and silver forward rates.
As you know, the lease rate is LIBOR minus GOFO and the same applies for silver. If they don’t report the silver forward rates, you can’t get the lease rate anymore, because we lost a parameter of the equation. James Turk says that the LBMA is underreporting on the silver forward rate. It’s reporting contango, but actually it should be in backwardation. When gold and silver are in backwardation, that means we will have high probability of getting inflation.
That’s what I’m making of this, unless there is someone who can give another explanation for the flat curve here:
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| Chart 1: Silver Lease Rate |
Luckily, we still have the gold GOFO and gold lease rates. The GOFO is still in contango (3 month GOFO = 0.42%). So we just use those to “assume” silver forward rate … If we do get a spike down in GOFO, then severe backwardation could show up.
One thing is certain. If gold lease rates go up, the GOFO goes down and that means the gold goes in backwardation. And that also means that silver is going in backwardation. That ultimately means that you should buy silver when silver lease rates go up.
If this event of the LBMA isn’t a reason to buy silver, I don’t know what is.
And finally, isn’t it a coincidence that the silver priced started to move up just when the curve went flat (Chart 1)?
Silver Inventories at CME and Lease Rates
Just a few weeks after I turned bullish on silver, articles are sprouting out of nowhere about silver inventories being historically low.
However, I see signs of a temporary weakness in silver.
1) The silver stocks at the CME aren’t actually going down anymore. They are going upwards (Chart 1).
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| Chart 1: Silver Stocks CME |
2) The silver lease rates are actually going down, instead of going up. Historically, when silver lease rates plunge, the price of silver will go down a few months later.
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| Chart 2: Silver Lease Rate |
Conclusion: I would be wary about the price of silver. If this trend continues this way, look out below!
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.
Correlation Economics (Backup) 