Gold Lease Rates. What is going on, and what does it mean ?

[Steve Netwriter]

Starting from here:
http://www.kitco.com/charts/g_leaserates.html

where they appear to be turning down, led me to here:

http://www.kitco.com/lease.chart.html

with these:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Gold_LeaseRatesST_080330.gif

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Gold_LeaseRatesLT_080330.gif

and from here:

Forward Rates, Libor Rates and Lease Rates:
http://www.kitco.com/market/LFrate.html

this:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/ForwardLiborLeaseRates_080330.gif


Some related articles:

Lease Rates Tell Tales
http://www.gold-eagle.com/editorials_00/peters012500.html

Gold lease rates and the price of gold
The Mogambo Guru - Tue 02 May, 2006
http://www.dailyreckoning.co.uk/gold-investment/gold-lease-rates-and-the-price-of-gold.html


Would someone care to explain why and what this means, in simple language :)

Steve

[Spartacus]

I suspect that at some point kitco switched how they report "lease rate" - I think they used to report gold forward rates as the "lease rate".

they swithced at tome point reporting the forward rate MINUS Libor as the "lease rate".

Email Kitco and ask, maybe someone will answer.

The charts make no sense to me otherwise.

By the way, the Silver charts are far, far harder to make sense of.

[Jim Nickerson]

Starting from here:
http://www.kitco.com/charts/g_leaserates.html

where they appear to be turning down, led me to here:

http://www.kitco.com/lease.chart.html

with these:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Gold_LeaseRatesST_080330.gif

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Gold_LeaseRatesLT_080330.gif

and from here:

Forward Rates, Libor Rates and Lease Rates:
http://www.kitco.com/market/LFrate.html

this:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/ForwardLiborLeaseRates_080330.gif


Some related articles:

Lease Rates Tell Tales
http://www.gold-eagle.com/editorials_00/peters012500.html

Gold lease rates and the price of gold
The Mogambo Guru - Tue 02 May, 2006
http://www.dailyreckoning.co.uk/gold-investment/gold-lease-rates-and-the-price-of-gold.html


Would someone care to explain why and what this means, in simple language :)

Steve


Hellsbells, I thought if you were smart enough to find all that and post it, you would know what it meant in order to know what you were doing. As I rolled down the page my thought was I hope Steve explains all this, only to find you too need an explanation. Maybe someone will help, wish I could.

[Steve Netwriter]

Sorry Jim :(
I scrolled through your post hoping you were going to explain it :p

I've been trying to understand it, and talking to people on other forums, and now have various ideas. I'd really like someone like Jim Sinclair to give his view.

This is the 30 Day Lease Rate from Kitco:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Gold_Lease30DayRates_080330.gif

So the rates have fallen recently.

I don't know whether the large -2.75% red line on the plots I posted are right. It could be that the Kitco software wasn't expecting a negative lease rate :rolleyes:

There are also rates here: http://www.lbma.org.uk/statistics_current.htm
This has GOFO, LIBOR and LIBOR-GOFO.

I'll try and list a few of these ideas. I don't know which are right.

1. Central Banks are dumping gold.

2. Borrowed gold is being returned to the bullion banks, who have to return USD. They don't want to or can't cope with that, so are trying to encourage leasing.

3. Lease rate = LIBOR Rate - Forward Rate. This is normally positive.

I think something is going on. I just don't know what !

Steve

[Steve Netwriter]

Indians buying up gold?
Commentary: Gold bugs think Fed, other central banks making it available

http://www.marketwatch.com/news/story/peter-brimelow-indians-buying-up/story.aspx?guid=%7B958CF2D3-8E04-445A-9DDB-877B926CE3EF%7D&dist=hplatest

The second encouraging gold bugs: The lease rate for gold. This is the cost of borrowing gold. Thirty years ago, this was a detail, but with the huge expansion of lending to gold mining companies in the 1980s it became a big deal. In particular it was an important part of the argument of outfits like Gold Anti-Trust Association GATA (http://www.gata.org/) which argued that secretive activity in the gold market by central banks was crucial to understanding what was happening with gold.
In the past few days a strange thing has happened. Australia's Privateer says, "the shorter term (one and two-month) rates have actually gone into negative territory this week."
In other words, gold is being supplied to the market by the central banks. Privateer goes on: "We do not recall a previous instance of this, and there certainly has not been one since the cold bull market began in 2001-02 ...
"We have not -- until now -- seen a situation in which the central banks are actually paying the bullion banks, hedge funds, gold miners et al to borrow the stuff. And please don't forget that, in this context, leasing gold is actually "shorting" gold. Gold is not "leased" to be hoarded, it is "leased" to be sold for something that pays a far higher rate of interest ... the practice of 'leasing gold -- and silver' by the central banks has been one of their best means of suppressing the prices of these precious metals for a long time."
Interestingly The Privateer's wonderful $US 5x3 Point and figure chart withstood this week's slump. See chart (http://www.the-privateer.com/chart/gold-pf.html)
Goldbug conclusion: Central banks, led surreptitiously by the Fed, are supplying physical gold to the market. And wise heads like the Indians are buying it.

[Spartacus]

IIRC when you lease Gold or Silver you pay the forward rate.

In other words The price to do the lease is the forward rate, not the "lease rate".

Probably no one pays the "lease rate" - that's just a number to help industry participants decide if the lease is worth doing (if it will be profitable) today.


A negative lease rate is completely non-sensical. if you lease Gold, the company you're leasing from will give you Gold you must return at a later date, AND they'll PAY YOU to hold the Gold? That's what a negative price for leasing would mean, and that's why I think no one pays the "lease rate" for leasing - they pay the GOFO or SIFO.

[Spartacus]

It's common knowledge that Central Banks make Gold available.

Jeffrey Christian has been saying this for couple of years now, noting that I think in 2005 private owners held more gold than central banks.

I think in his last interview on Puplava Christian said private owners have only been net sellers of Gold 2 times in the last 50 years.

Central Banks have been dis-hoarding Gold for a long, long time.

http://www.mndental.org/archive/3_07/features/article_1/
"Central Banks generally have sold gold since the early 1970s, but continue to keep gold as an impor-tant residual reserve asset. In 1972, silver averaged $2, platinum $109, and palladium $48 an ounce"

Where some of the extreme gold bugs go their own way is in claiming the Central Banks have leased almost all their gold and have very little left.


Indians buying up gold?
Commentary: Gold bugs think Fed, other central banks making it available

http://www.marketwatch.com/news/story/peter-brimelow-indians-buying-up/story.aspx?guid=%7B958CF2D3-8E04-445A-9DDB-877B926CE3EF%7D&dist=hplatest

[Spartacus]

http://itulip.com/forums/showthread.php?t=2083&highlight=silver+lease+rates

[krakknisse]

You may also find this article (http://www.lbma.org.uk/publications/alchemist/alch29_Leases.pdf) interesting, from the LBMA, esp. Figure 1. It seems to me that the gold lease rates have never been negative, at least since 1993.

I found this article (http://www.financialsense.com/fsu/editorials/2006/0119.html) more informative as to basics. Isn't this what is happening? Sorry about being so basic, I'm writing this to clear my head. There are three players:

a) The institution that borrows out the metal is not getting much - just a fixed fee, but it is a way to get some income from an otherwise cash-flow-wise "dead" asset. The institution also takes on a credit risk, because the lendee could default.
b) The real action is with the someone who does the lending. He has to sell it on - otherwise the gold would be as dead to him as to the central bank, minus the lease fee. The lendee sells it in the spot market, so the physical gold is now in the physical and legal ownership of someone else (lucky buyer!). The lendee now is minus gold, minus lease fee. The lendee then must buy gold on the spot market at the termination of the lease contract to give it back to the lender. The only way this could be profitable is that the gold price is falling between two time points of lending and paying back.
c) The buyer of the lent gold takes the opposite side of the bet versus the lender and the lendee, betting on a rise in gold prices. The lendee takes the most risk, but the lender also has an interest in a falling gold price, because a rising gold price increases the default risk. If the lender was speculative, he could lease his gold even though he thought gold prices were increasing, as long as they were not increasing so much as to cause default from the lendee, thus generating a fixed fee _and_ an increasing asset value at the end of the contract.

Regarding the negative lease rate, the LBMA has on its statistics page (http://www.lbma.org.uk/statistics_current.htm) three statistics and an explanation (http://www.lbma.org.uk/london_faq_gofo.htm):
1) Gold forward rates - absolute percentages. Lend your gold out today and get dollars back today (at the current LBMA fixing price in US dollars), At the termination of the contract, you swap the exact amount of dollars (minus this percentage) for the exact amount of gold back.
2) LIBOR - Interbank offered rate, self-explanatory
3) Derived gold lease rates - LIBOR minus gold forward rates. They probably quote this because the lender would at a minimum put the lendees dollars into an instrument that pays the LIBOR.

A negative derived gold lease rate means that
1. Demand for gold leases are low. That is, the aggregate demand for shorting gold is low. That is, the volume of gold that lenders want to lend out is large relative to the volume of gold that lendees want to lend.
2. It follows that, in aggregate, lenders are more negative about gold than lendees. They are willing to assume default risk _and_ to get a very low fee for the privilege of putting their borrowed dollars in a LIBOR account for the duration of the contract. Either lenders are desperate for cash flow (but why don't they sell), they think the price is going down (but why don't they sell), or something fishy is going on.

A negative derived gold lease rate does not mean that they will pay you to short gold. Rather, it is that the demand for gold shorting is much lower than the demand for actual cash in the LIBOR market. So the lenders are willing to take a very low fee to induce the lendee to take on the risk of shorting (gold has substantial volatility).

Now, if the actual gold lease rate was negative, that'd be interesting.

Central banks lease out gold and silver at very low metal interest rates. For gold, this is down around .1% per year. The gold is loaned to a bullion bank who then lends it to consumers at these low rates and it is then quickly sold on the spot market. Some is fabricated into jewelry, marked up 4 to 12 times and sold, but it is all sold. The central bank gets back a lease contract and puts this in the vault as a gold credit and counts the gold as still there in the vault. Upwards of two thirds of central bank gold being dumped on the markets is this invisible form of selling. If asked, the Western central banks will say they have close to 30,000 tons of gold in their vaults, when the actual tonnage is closer to 15,000 tons.

[Steve Netwriter]

Guys, a quick thank you for your replies.
I haven't managed to find the time yet to read everything, but I can see from a quick scan that it will be well worth reading.


I see the rates have mysteriously jumped back up.

[The Outback Oracle]

Thanks Krak...brilliant! From one who knows not and knows that he knows not!