Lease

GOFO Rates Vs. Gold Price

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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.

Gold miners hedging Vs. Gold lease rates

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Gold miners hedge their gold production in case the gold price drops. This increases demand for borrowing gold. Gold lease rates rise.

In the year 2000, everyone was hedging gold, because the gold price kept falling. Gold lease rates peaked in 2000.

After 2000, the gold price went up and hedging decreased. When the price of gold rises, gold miners typically decrease their gold hedging, because they want to profit from the rise in gold. The decrease in hedging led to a decrease in lease rates.

Backwardation in Gold: GOFO = LIBOR – GLR

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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.

Palladium lease rates signal shortage

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Palladium lease rates have been rising tremendously and signal that there is a shortage of palladium.

 

JP Morgan is fleeing and reducing eligible palladium stock at the COMEX.

When this shortage persists and automakers won’t have access to palladium anymore, they won’t be able to produce cars, because they simply don’t have palladium anymore.

So what do you think they will do when this happens? Answer:

Platinum is going to shoot past $1000/ounce as I predicted.

Gold Lease Rates Topping Out

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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.