Negative lease rates for gold (and silver)

Welcome to the Precious Metals Bug Forums

Welcome to the PMBug forums - a watering hole for folks interested in gold, silver, precious metals, sound money, investing, market and economic news, central bank monetary policies, politics and more. You can visit the forum page to see the list of forum nodes (categories/rooms) for topics.

Why not register an account and join the discussions? When you register an account and log in, you may enjoy additional benefits including no ads, market data/charts, access to trade/barter with the community and much more. Registering an account is free - you have nothing to lose!

dereksatkinson said:
Well. what should we take from lease rates rising?
Click to expand...
They're calculated like this:
Libor minus gold forward rates (L - GOFO = lease rates). If the libor stays flat (which it does), then gold forward rates have to fall in order for lease rates to rise. I.e. the futures curve moves towards backwardation.
If gold forward rates are significantly negative (i.e. deep backwardation), there's a strong incentive to lease gold into the market.
Leasing is always part of a carry trade:
You lease the gold, sell it into the market, use the funds raised from the sale to make "risk free" money market returns, and cover your lease at the end of duration in order to give the amount of gold back to your lender. You don't want price risk, so you buy the gold forward immediately after you sell the gold from the leasing agreement.
This transaction only makes sense if your return in money markets is higher then the cost of the forward purchase of the gold. In a ZIRP environment, this is obviously not (often) the case.
In essence, rising lease rates indicate tightening supply.
 
Pretty significant moves in silver rates today, especially 6 months and 3 months:
25qyj2r.gif


Gold rates are also on the move...
 
lease rates

I have heard so many different opinions on these rates. Thx for posting. So would you say these rising lease rates mean people are being offered more to lend their gold and silver therefore, greater demand?

I can see the pt of someone lending their gold to earn money but what does the borrower do with the gold?

Thx
 
escobar said:
I have heard so many different opinions on these rates. Thx for posting. So would you say these rising lease rates mean people are being offered more to lend their gold and silver therefore, greater demand?

I can see the pt of someone lending their gold to earn money but what does the borrower do with the gold?

Thx
Click to expand...
The borrower does the carry trade I described above, i.e. he sells the gold immediately and buys it back later when the lease agreement ends. The price for the repurchase is determined right after the first sale through a forward agreement:
http://www.pmbug.com/forum/f2/negative-lease-rates-gold-silver-341/index3.html#post5632

The rates which are beeing reported by Kitco are NOT the actual rates paid to the lender, they just indicate whether this carry trade would be profitable, i.e. whether you can make more money in the money market than your cost of buying your gold forward.

Here is a more detailed description of the gold carry trade:
 
Lease rates barely changed during the last days, despite all the chaos in the paper markets:

Short term gold rates actually rose a little bit today, indicating (slightly) tightening physical supply:

24life9.gif


The 1 year chart illustrates the trend better, the gold market is certainly NOT flooded with physical supplies:
2m2jcw5.gif


---------------------

It might be that somebody dumped some physical silver into the market today
24e81af.gif
[/IMG]

Silver's 1 year chart doesn't look as good as gold's, however, the bottom was on February 29th, a big downday for the metals.
r8s5rs.gif
 
I still don't get how ANYONE would alklow their metal to be "leased" for essentially a negative return. Who in their right mind does this [except GovCo of course]? It is my understanding that our government does not have stocks of these metals just laying around somewhere, which must mean [in a linear world of course] that it is private metal that someone is willing to pay me to borrow.
 
ancona said:
I still don't get how ANYONE would alklow their metal to be "leased" for essentially a negative return. Who in their right mind does this [except GovCo of course]? It is my understanding that our government does not have stocks of these metals just laying around somewhere, which must mean [in a linear world of course] that it is private metal that someone is willing to pay me to borrow.
Click to expand...
These rates are not the actual borrowing rates. It's merely a "synthetic" calculation which shows whether or not it is attractive to lease out metal to use it for a carry trade.
The calculation goes like this libor (minus) metal forward rate = lease rate = potential profit of a carry trade. Carry trade means selling the metal after receiving it from the lender and buying it back later for a fixed price. In the meantime investing the funds raised from the sale in money markets. This carry trade is only profitable if the cost of buying the metal forward is lower than the interest from the money market investment.
 
OK, now i've got it. So, in layman's terms, this is merely an indicator of perceived profitability which one would use when making the decision to lease or not to lease. So it's just a tool of a sort.
 
Gold rates are slowly rising again
krtde.gif


Silver unchanged.

Platinum and Palladium still heavily on the rise.
 
Platinum and palladium are such a small market, I would think them to be much more volatile than silver.
 
I'm overwhelmed by this information. I just want clarification about the lease rates. Who exactly benefits most from the negative interest rates on gold, the borrowers or the lenders? I also just thought people bought portions of gold similar to the way that people buy stocks or bonds.
 
kjansen1969 said:
I'm overwhelmed by this information. I just want clarification about the lease rates. Who exactly benefits most from the negative interest rates on gold, the borrowers or the lenders? I also just thought people bought portions of gold similar to the way that people buy stocks or bonds.
Click to expand...

These rates indicate tightening physical supply when they're rising, that's all.
Please read these posts:

http://www.pmbug.com/forum/f2/negative-lease-rates-gold-silver-341/index3.html#post6685

http://www.pmbug.com/forum/f2/negative-lease-rates-gold-silver-341/index3.html#post5632
 
SA,
So, with platinum group metals surging lease rates, at least over the short term, does this mean an increase in demand that is not being answered or does it merely call out the increased volume of sales? I ask because since P-group metals are primarily catalytics that are used in industrial settings, implying either lower stocks due to some sort of suply line disruption [strikes, cost of mining V return, etc.] or increased demand from manufacturers of things like electronics, solar, chemicals etc.

I am interested because I remember a long while ago when car sales were really shooting for the stars, platinum became pretty hard to get due to the sheer quantity required to support pollution control devices on vehicles. In addition, with the new ultra-low sulpher requirements in deisel engines, to include heavy equipment, I am unsure if P-group metals are used to catalyze exhausts from those engines, but suspect they may be.
 
Last edited:
Whether it is increasing demand or shrinking supply can't be directly deducted from the rates. They only show a shift towards a tightening market, i.e. the balance between supply and demand.

The only news I could find about PGMs is that South African mine output fell 47 % in February compared to one year ago on strikes and safety issues. That's probably the reason:
South Africa’s mining output fell sharply in volume terms in February, reflecting the impact its government safety drive, which has slowed production and a crippling strike at the world’s biggest platinum mine.
According to Statistics South Africa, production of platinum group metals (PGMs) fell 47.6% while gold output dropped 11.5% in volume terms in February. Total mineral production was down 14.5% compared with the same month last year.
An illegal and deadly six-week strike at the massive Rustenburg operations of Impala Platinum, the world’s second largest producer of the precious metal, was the main cause of the sharp PGM decline. With a reported 120000 ounces loss in output, it effectively cut 15% of global supply for several weeks.
Also, SA’s government drive to reduce mining deaths has led to more inspections which translated to shutting shafts and a cut in production.
In a trading statement on Tuesday, AngloGold Ashanti declared that the South African safety stoppages cost the company 76000 ounces of lost production in the first three months of 2012, more than for the whole of last year.
South Africa is the world’s top platinum producer and remains a major gold player.
Click to expand...
http://www.ventures-africa.com/busi...ing-output-hit-by-strike-safety-measures/2436
 
OK then, that would probably explai n most of it, with program trading and manipulation picking up the balance of the imbalance.
 
I'm posting this from a mobile: somebody please post a chart of the current SILVER lease rates :D
:popcorn:
 
Damn son, that's a pretty decent jump! I guess that means silver will be taking a ride on the old "sky-hook" pretty soon?
 
The lease rates appear to have returned to April 16 levels. Very strange one day pop they had.
 
I'm still on the road, so somebody please google: "lbma silver forward rates". Then clickr 2012 and check the last few days for dramatic changes. Maybe kitco had misquoted/miscalculated the lease rates. The platinum and palladium rates on kitco's website were'nt updated for a few days now by the way...
 
SIFO:
DATE...... 1 Month 2 Months 3 Months 6 Months 12 Months
13-Apr-12 0.50000 0.50200 0.50200 0.49800 0.47400
16-Apr-12 0.50250 0.50000 0.50000 0.50000 0.45750
17-Apr-12 0.50000 0.50250 0.50250 0.49750 0.44500
18-Apr-12 0.51667 0.51500 0.51500 0.50833 0.47500
19-Apr-12 0.51333 0.51400 0.51400 0.50667 0.47500

LIBOR - SIFO not posted for those dates.
 
It was only stocks opex today, metals opex is next wednesday (4-25)

There were'nt any significant changes in rates today.
 
I know that SA, I was just saying that one can affect the other. If there are perceived weaknesses in stocks, the safety trade gets a boost, and if the stock market out performs, then metals don't get as much attention.
 
SA,
That chart is about as exciting as watching corn grow.........although I suppose it would be better if it was something crazy......like 30%.... ;-)
 
Sure, but it's a sign of increasing phyiscal supply, so somebody has been dumping serious amounts of physical gold into the market. The timing is suspicious:
Either we get some CTRL+P announcement tomorrow and they want to hold gold back or we could get another massive downday ($100 +) like last time.
 
Would not surprise me a bit if they are trying to limit any gold/silver pop with a Ctrl+P announcement.
 
Expect the unexpected..

Don't forget that other central banks are buyers now in size. All that buying coming ahead of this month.. I'm not sure if I am reading too much into it but I could see a short squeeze today.
 
You must log in or register to reply here.
Back
Top Bottom