Tuesday, September 8, 2009

Gold Lease Rates A Bit Funky

So Gold cracks $1000 and we have a lease rate inversion with the 3mo @ -.086, 2 mo @-.075, 1 mo @ -.039. The gold market is saying: PLEASE BORROW and SELL !!! But, it seems there's not enough incentive to fight this move.

The Basis (Futures - Spot, or GOFO rate) is actually getting higher relative to LIBOR, tempting holders to sell foward as we rally higher. This is the market's natural way of trying to deal with a glut of metal; providing incentives for buyers and holders of the metal to offer it in the future, rather than the present.

What's interesting is that the 3 mo rate is lower than the 2mo, which is lower than the 1mo. Generally, as we value current goods more than future goods, there should be an upward slope of rates as it "costs" us more to give up something for a longer time, but not right now in Gold. The market is screaming for people to take the metal now and sell it/swap it back in 3 mo. time. This time of saturation in spot is not a very bullish sign, as it shows a glut of metal that could come on to the market as straight sales... The fact that you are nominally getting PAID to actually borrow, and more so the longer the duration of the the loan(up to 3mo) should send up warning flags. The supply of lendable/swapable gold is large, or the demand for it(to sell into the market) is low; either way, if the market reverses, these conditions could add fuel to the downside; but as long as we keep rallying they are simply symptoms of a strong run up in the metal, and warning signs we should watch.

What would be very bullish would be to see the lease rates start to spike, indicating that gold is "hibernating" and demanding a premium to come out of hiding...

(Note: I am not turning bearish on gold because of this, the long-term trade is clearly intact; this is simply a warning sign we should be aware of. There are numerous factors that may mitigate or vitiate this signal, which we haven't taken account of. What's happening with lease/swap rates is just a small part of the entire picture.)

(2nd Note: I don't give financial advice; nothing I say should be taken as such. Consult your financial adviser before investing and DON'T TAKE ADVICE FROM RANDOM PEOPLE ON THE INTERNET - like me.)