Negative lease rates for gold (and silver)

[Unbeatable]

...To further support our price manipulation hypothesis, we overlay the 1-month GOFO rate with days where the gold price suffered significant declines (more than 3%) in Figure 4. Unless it is the actual price drop that sparks all this increased demand, it seems counterintuitive that the gold price would decline precipitously before large declines in the GOFO rate, which implies increased demand for physical gold from bullion dealers.

It now seems that bullion banks are in desperate need of bullion, as evidenced by the increasingly negative GOFO rates we are seeing (Figure 4 below). Remember that a negative GOFO rate signifies that the bullion banks are ready to pay holders of physical to lease their gold, in this case for a month...In our view, the bullion banks’ fractional gold deposit system is testing its limits. Too much paper gold exists for the amount of physical gold available. Demand from emerging markets, who do not settle for paper gold, has perturbed the status quo.

http://sprottgroup.com/thoughts/art...banks-and-the-physical-gold-market-conundrum/

 

[Unbeatable]

05-Jul-13 0.01500 0.03167 0.05167 0.09667 0.21833
08-Jul-13 -0.06500 -0.04333 -0.03000 0.03500 0.18167
09-Jul-13 -0.10600 -0.08400 -0.07000 -0.01000 0.13800
10-Jul-13 -0.11167 -0.08000 -0.05833 -0.00167 0.14000
11-Jul-13 -0.05167 -0.02833 -0.01500 0.04667 0.15833
12-Jul-13 -0.04167 -0.02333 -0.01333 0.06167 0.17000
15-Jul-13 -0.05500 -0.04000 -0.02333 0.06167 0.18500
16-Jul-13 -0.05667 -0.04333 -0.02500 0.06333 0.18833
17-Jul-13 -0.06500 -0.04667 -0.03000 0.05833 0.17667
18-Jul-13 -0.08167 -0.06833 -0.05500 0.04167 0.16000

Rates continuing to get worse this week...

 

[pmbug]

... and 6mo & 1 year are also going down.

 

[Unbeatable]

19-Jul-13 -0.07833 -0.06500 -0.05000 0.03500 0.15333

1 & 2 months 'slightly' better but longer terms, 3-12 months are down.

 

[swissaustrian]

There is a tsunami of "gold miners return to hedging" out in the financial media, see this summary: http://goldnews.bullionvault.com/gold-mining-071720135
They seem to misunderstand what negative forward rates mean:
Hedging (forward selling) isn`t attractive if spot trades at a premium over forwards (backwardation).
Even the long end of the futures curve isn`t in deep contango (big premium over spot): http://www.cmegroup.com/trading/metals/precious/gold_quotes_globex.html

Here is some background on gold miner hedging activities:
http://www.zerohedge.com/contributed/2013-06-27/selling-low-and-buying-high-hedging-gold-miners

 

[Unbeatable]

SwissAustrian,

I don't understand futures/hedging very well.

As I understand it, many mines are being forced to hedge because the gold price is so close to the cost of production that they can't risk a lower gold price because they would be forced to shut down operations. So they're locking in prices today/hedging so they can at least stay in business.

What is their best/another option at moment?

 

[Unbeatable]

19-Jul-13 -0.07833 -0.06500 -0.05000 0.03500 0.15333
22-Jul-13 -0.07833 -0.06500 -0.05000 0.02500 0.14833

Into the third week of backwardation....

 

[DSAbug]

What is their best/another option at moment?

Their best option is to wait for prices to rise IMHO.

Most of these companies aren't in a situation where they must sell the gold they have. If they want downside protection, they can use options to hedge their production.

I have heard rumors of companies going private because their shares are too cheap (trading below cash and/or 3 years production). Once a company does go private, they can distribute production as a non-taxable event. Now that is a dividend I'd want to get.

 

[benjamen]

It used to be rare for me to read about backwardation on other websites, but I am running across a lot of people worrying about this recently.

"It is important to understand that gold should never ever go into backwardation unless something is really wrong. Gold is money and future money should ALWAYS carry interest with it. When gold for delivery today costs more than gold for delivery in the future, it carries with it “negative interest.” These phenomena can happen in other commodities if there is a shortage, since gold has been mined for 5,000 years and vaulted, no shortage can occur…"

"...investors have finally figured out that the jig (rig) is up. Let me explain, if investors want gold now, today, it is worth paying more (interest upfront) to get it. Maybe investors are afraid that at a later date they will not receive delivery. Maybe the message has finally gotten out to enough investors that the whole game is that of “fractional reserve.” Just because you have a piece of paper that says that you own gold…maybe you really don’t."

"Inventories are depleting as evidenced by the ABN Amro default, COMEX inventory depletion and GLD bleeding gold like its jugular vein has been slit."

"More and more people want their gold today, at a higher price, no matter that they can buy a future much cheaper,"

http://www.reuters.com/article/2013/07/19/derivatives-gold-idUSL1N0FP1CB20130719
http://blog.milesfranklin.com/is-there-anything-else-necessary

 

[Unbeatable]

22-Jul-13 -0.07833 -0.06500 -0.05000 0.02500 0.14833
23-Jul-13 -0.07167 -0.05833 -0.04333 0.03333 0.15667

Rates have improved slightly since yesterday.

 

[Unbeatable]

From the pretty mainstream, 'Business Insider'...

Traders Are Talking About A Gold Conspiracy Theory And There's Evidence To Back It Up

For several months "physical gold" (bracelets, coins and small bars) have seen near riotous demand with long lines stretching into the streets. At the same time "paper gold" (ETF's, futures and nominal spot) have seen sharply falling prices. That dichotomy has sparked more than a few conspiracy theories.

A key support of these theories is the backwardation in gold – the spot price is higher than the near future contract. That's unusual. It could normally be resolved by selling spot gold and buying the cheaper future one month out. Thus, in a month, you would reap an apparent locked-in, riskless profit. Yet no one seems to be doing it. Is there doubt that there is gold in storage that will be deliverable in a month? So, the theorists assume.

Is there something the traders know that we don't know? Are there other forces preventing the arb opportunity from being arbed away?

http://www.businessinsider.com/art-cashin-gold-backwardation-conspiracy-2013-7

 

[Unbeatable]

22-Jul-13 -0.07833 -0.06500 -0.05000 0.02500 0.14833
23-Jul-13 -0.07167 -0.05833 -0.04333 0.03333 0.15667
24-Jul-13 -0.06667 -0.04833 -0.03500 0.04333 0.15500


Rates mostly continuing to improve a bit.

 

[Unbeatable]

24-Jul-13 -0.06667 -0.04833 -0.03500 0.04333 0.15500
25-Jul-13 -0.06667 -0.04833 -0.03167 0.04333 0.16333

Rates still negative but pretty stable

 

[pmbug]

23rd consecutive day of negative rates although they appear to be easing upwards...

31-Jul-13 -0.04833 -0.03333 -0.01167 0.06167 0.18000

 

[Unbeatable]

01-Aug-13 -0.05667 -0.03333 -0.01333 0.05833 0.18000

1 month rates a little worse today.

Yeah 24 days now, crazy!

 

[swissaustrian]

The new normal :flail:

 

[Unbeatable]

29-Jul-13 -0.05667 -0.04167 -0.02667 0.05500 0.17333
30-Jul-13 -0.05333 -0.04167 -0.02833 0.05500 0.17667
31-Jul-13 -0.04833 -0.03333 -0.01167 0.06167 0.18000
01-Aug-13 -0.05667 -0.03333 -0.01333 0.05833 0.18000
02-Aug-13 -0.06000 -0.05167 -0.01833 0.05833 0.18333

1 & 2 months rates getting, worst they've been all week so I guess the rates will stay negative next week as well.

 

[pmbug]

It's amazing how long these rates have been negative. Based upon the news/commentary when this first started, I don't believe rates have ever stayed negative this many consecutive days.

 

[swissaustrian]

It's amazing how long these rates have been negative. Based upon the news/commentary when this first started, I don't believe rates have ever stayed negative this many consecutive days.

There were only two prior brief periods of negative rates with a maximum of 3 days in 1999 and 2008:
http://www.pmbug.com/forum/f2/negative-lease-rates-gold-silver-341/index8.html#post22945

One has to take ZIRP into account, though. Negative rates are more likely if fiat interest rates are close to zero, too.

 

[Unbeatable]

One has to take ZIRP into account, though. Negative rates are more likely if fiat interest rates are close to zero, too.

Yeah I suppose this is true too.

But regardless, another Monday another negative rate day...

05-Aug-13 -0.07167 -0.05667 -0.04000 0.05000 0.17000

Rates seem to be getting worse and the Indian wedding season will also be here before you know it...

 

[Unbeatable]

31-Jul-13 -0.04833 -0.03333 -0.01167 0.06167 0.18000
01-Aug-13 -0.05667 -0.03333 -0.01333 0.05833 0.18000
02-Aug-13 -0.06000 -0.05167 -0.01833 0.05833 0.18333
05-Aug-13 -0.07167 -0.05667 -0.04000 0.05000 0.17000
06-Aug-13 -0.08833 -0.08000 -0.06333 0.02000 0.15667

Definitely a pattern of worsening rates developing.

 

[pmbug]

Are we going to see negative rates out to 6 months again?

 

[ancona]

31-Jul-13 -0.04833 -0.03333 -0.01167 0.06167 0.18000
01-Aug-13 -0.05667 -0.03333 -0.01333 0.05833 0.18000
02-Aug-13 -0.06000 -0.05167 -0.01833 0.05833 0.18333
05-Aug-13 -0.07167 -0.05667 -0.04000 0.05000 0.17000
06-Aug-13 -0.08833 -0.08000 -0.06333 0.02000 0.15667

Definitely a pattern of worsening rates developing.

This is like that scene in Matrix where the girl in the red dress walks by......

 

[Unbeatable]

31-Jul-13 -0.04833 -0.03333 -0.01167 0.06167 0.18000
01-Aug-13 -0.05667 -0.03333 -0.01333 0.05833 0.18000
02-Aug-13 -0.06000 -0.05167 -0.01833 0.05833 0.18333
05-Aug-13 -0.07167 -0.05667 -0.04000 0.05000 0.17000
06-Aug-13 -0.08833 -0.08000 -0.06333 0.02000 0.15667
07-Aug-13 -0.11000 -0.09667 -0.08500 0.00167 0.13833

Worst 2 and 3 month rates since backwardation begun! (The 1 month was only worse on July 10th)

This is like that scene in Matrix where the girl in the red dress walks by......

The Matrix is a bit too much like reality these days for my liking...

http://en.wikipedia.org/wiki/The_Matrix

A dystopian future in which reality as perceived by most humans is actually a simulated reality called "the Matrix", created... to subdue the human population.

Morpheus: The Matrix is everywhere. It is all around us. You can see it when you turn on your television. You can feel it when you go to work... when you pay your taxes.
It is the world that has been pulled over your eyes to blind you from the truth.
Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage.

 

[swissaustrian]

This is like that scene in Matrix where the girl in the red dress walks by......

I don`t know which scene you are referring to, but this scene might also be adequate to describe the current GOFO situation

 

[pmbug]

...
07-Aug-13 -0.11000 -0.09667 -0.08500 0.00167 0.13833

Worst 2 and 3 month rates since backwardation begun! (The 1 month was only worse on July 10th)
...

Spot goes down, GOFO goes down. Someone (big) is obviously BTFD.

 

[Unbeatable]

'I love the smell of Napalm in the morning!'

01-Aug-13 -0.05667 -0.03333 -0.01333 0.05833 0.18000
02-Aug-13 -0.06000 -0.05167 -0.01833 0.05833 0.18333
05-Aug-13 -0.07167 -0.05667 -0.04000 0.05000 0.17000
06-Aug-13 -0.08833 -0.08000 -0.06333 0.02000 0.15667
07-Aug-13 -0.11000 -0.09667 -0.08500 0.00167 0.13833
08-Aug-13 -0.12167 -0.10000 -0.08333 -0.00600 0.13333

Worst 1 & 2 month rates since backwardation begun! 6 month rates go negative again.

What's interesting is the fact that the GOFO is indicating extreme short term shortages in bullion over in London despite the fact that India and the Muslim world has been largely dormant for the past 4 weeks with Ramadan and the Government trying to stop Indians from buying gold. Ramadan ends tonight and the primary Indian gold-buying season will start to kick in.

http://harveyorgan.blogspot.co.uk/

 

[pmbug]

09-Aug-13 -0.11500 -0.09667 -0.08000 -0.00500 0.12833

All rates except the 12 month eased a bit.

 

[Unobtanium]

It is nice to visualize this in chart form also:

 

[Unbeatable]

The GOFO rate seems to have been very stable for the last week.

13-Aug-13 -0.11000 -0.09000 -0.07250 0.00500 0.13250
14-Aug-13 -0.11000 -0.09333 -0.07667 0.00167 0.13667
15-Aug-13 -0.11000 -0.09500 -0.08000 0.00250 0.13750
16-Aug-13 -0.11167 -0.09667 -0.08167 -0.00500 0.13667
19-Aug-13 -0.11000 -0.09667 -0.08000 -0.01000 0.13000
20-Aug-13 -0.11000 -0.09667 -0.08833 -0.01000 0.13167

Artificial?

Obama is meeting with the financial big boys today and ZH is predicting another gold smackdown.

http://www.zerohedge.com/news/2013-08-19/obama-about-crash-gold-market-again

Another gold smackdown coming “@markknoller: Meeting with POTUS tomorrow are heads of CFPB, FHFA, the Fed, CFTC, FDIC, NCUA, the SEC & OCC

while correlation is not causation, recall what happened the last time the President, somewhat unexpectedly, met with the CEOs of all the big banks.

Personally I don't think there is any gold price play that can stem the physical demand now.

So IMO I think it could be the Comex closing/changing delivery meeting. (Given the continuing record physical demand, deteriorating Indian situation, precarious Comex stockpile & the possible artificial GOFO stabilization leading up to the meeting.) $.02

 

[pmbug]

...
Personally I don't think there is any gold price play that can stem the physical demand now.
...

A significant rise in gold prices might do it. Raising prices is the normal market mechanism to control high demand is it not?

 

[rblong2us]

hard to do the MOPE though .........

Any sudden rise in pm's will likely send a very strong negative signal.

My guess is that it is allowed to rise in a managed way with the odd slapdown to keep us all on our toes.

 

[Unbeatable]

A significant rise in gold prices might do it. Raising prices is the normal market mechanism to control high demand is it not?

My $.02

In theory, but in the West it seems to be the opposite. Rising prices tend to attract new buyers and vice versa. (I think bubbles, internet & housing, imagine if gold rose 13 years in a row.)

ETF physical buying during the price rises and ETF physical selling during the April crash shows that the West sells physical overall in falling price environments (+-400 tons in Q2) & that conversely we will probably add to the demand pressures on gold if prices started rising.

India is price sensitive but as their currency is deteriorating so rapidly.

http://www.zerohedge.com/news/2013-08-19/indian-rupee-collapses-worst-day-20-years

since May 2nd, holders of paper Rupee have lost 18% of their purchasing power while those that held gold instead have seen their 'wealth' appreciate 13% in local purchasing power

So I think Indians will be converting their rupees to gold as fast as they can, at this stage rising gold prices may only amplify this.

(Rising prices could increase scrap supply though, but only by max 100 tons per quarter.)


The only short term solution I can see (other than Comex default) -

Keep gold prices at or slightly higher than their current level and pump loads of money into stabilizing the Rupee. (So I think we may see the Rupee 'miraculously' recover after this meeting, if we don't, I reckon default soon.)

 

[Unbeatable]

GOFO rates were pretty stable going into the meeting Obama had with the CEOs of all the big banks but today 1-3 months rates were at or worse than they've been since backwardation started in early July. Very interested to see how they'll look tomorrow morning.


13-Aug-13 -0.11000 -0.09000 -0.07250 0.00500 0.13250
14-Aug-13 -0.11000 -0.09333 -0.07667 0.00167 0.13667
15-Aug-13 -0.11000 -0.09500 -0.08000 0.00250 0.13750
16-Aug-13 -0.11167 -0.09667 -0.08167 -0.00500 0.13667
19-Aug-13 -0.11000 -0.09667 -0.08000 -0.01000 0.13000
20-Aug-13 -0.11000 -0.09667 -0.08833 -0.01000 0.13167
21-Aug-13 -0.10833 -0.10333 -0.08833 -0.02000 0.12333
22-Aug-13 -0.12167 -0.11000 -0.09167 -0.01667 0.12833

 

[Unbeatable]

They haven't updated the rates yet, I don't know how unusual this is, usually they're published about 20 min ago.

Edit/Update: 30 min+ later than usual but rates have generally improved today...


22-Aug-13 -0.12167 -0.11000 -0.09167 -0.01667 0.12833
23-Aug-13 -0.10833 -0.09333 -0.07667 -0.01000 0.13667

 

[swissaustrian]

Seems like backwardation is coming to an end:

23-Aug-13 -0.10833 -0.09333 -0.07667 -0.01000 0.13667
27-Aug-13 -0.05000 -0.04167 -0.03167 0.01167 0.14167
28-Aug-13 -0.04833 -0.03833 -0.02500 0.01333 0.14000
29-Aug-13 -0.04667 -0.03500 -0.01500 0.02000 0.14833
30-Aug-13 -0.00667 0.01500 0.02500 0.05667 0.16667

 

[pmbug]

Most interesting. Did the demand for physical gold abate with the rise in spot price? Was a glut of supply found?

 

[swissaustrian]

After a few days of overall positive rates, the 1m rate has turned negative again today. The trend is downwards again. Tomorrow should see even more negative rates follwing the raid in gold today.

30-Aug-13 -0.00667 0.01500 0.02500 0.05667 0.16667
02-Sep-13 0.00167 0.01333 0.02500 0.06000 0.15833
03-Sep-13 0.00833 0.01667 0.02833 0.06000 0.16833
04-Sep-13 0.00000 0.01200 0.02400 0.05800 0.16667
05-Sep-13 -0.01333 0.00667 0.01667 0.06000 0.16833

 

[pmbug]

...
During each of those two previous periods, gold was in backwardation for just a few days. In contrast, the backwardation that ended Monday prevailed for a totally unprecedented and record breaking 40 trading days. During that time, gold rose from $1,200 to over $1,430. It was a spectacular jump in price. But with gold again below $1,400, the backwardation has re-appeared.
...

http://kingworldnews.com/kingworldn...Gold_Slips_Into_Backwardation_Once_Again.html

 

[Unobtanium]

And the latest movement in graphical format: