I have been listening all week about how the gold bull market is over and how gold is going way down etc. I know that the gold price is seriously manipulated and how the gold holdings in the various banks and by countries is leveraged something like 45X the physical.
(11) A break in the linkage between interest rates and gold prices can also happen if and
when the Gold Forward Offered rate exceeds LIBOR. This could occur if deflationary
pressures drive general market interest rates lower at the same time that significant gold
demand fails to find an outlet in the spot market due to limited physical supplies. The
result could be negative gold "lease rates" as gold price expectations may create an
entirely new phenomenon: cash borrowed to buy gold for future delivery (what I call
"gold bonds"). In effect, this is the equivalent of gold owners forward selling their gold at
higher and higher prices, and receiving cash up front to be used for current liquidity
needs. The difference from gold swaps is that the gold would not change hands until a
future date. Gold bonds, in effect, represent an unlimited short position in cash. I note
that such a situation would not actually be sustainable ad infinitum because it requires a
certain level of confidence in the paper markets - - confidence that erodes by definition as
gold demand accelerates. Stated another way, the escape of gold bonds from the genie's
bottle - - as evidenced by gold "lease rates" turning negative - - will spell certain doom to
all fiat currencies - - as evidenced by gold “lease rates” turning positive and accelerating
(12) Thus, gold's ultimate ascendance may be heralded by a bottoming and reversal of
negative gold "lease rates". I would expect this reversal to accelerate as the Gold Forward
Offered rate starts to reach parity with LIBOR (which itself could be exploding higher)
while the spot price of gold races ahead of the futures/forward price due to physical
demand for bullion increasing exponentially. One contributing factor to this scenario
might be the desperate attempt to unwind gold "leases" en masse. The end of the road 11
would be gold reaching permanent backwardation as predicted by Prof. Fekete. With cash
gold exceeding gold for future delivery, gold would then have its own "monetary interest
rate". Gold "lease rates" and Gold Forward Offered rates would become meaningless.
Until then, it may be appropriate to refer to the gold "lease rate" as the "gold interest rate"
so long as we realize that it is actually inverted right now. By "inverted", I mean gold
prices should normally be in backwardation if gold was universally treated as money,
whereas gold is currently in contango and reflects the common view that it is merely an
asset class. Of course, backwardation and contango won't really mean anything when
gold is money since the distant value of gold will simply be expressed in terms of interest
and present value - - money in hand always being more valuable than a distant promise of
money - - just like the distant value of a fiat currency is lower than its present value under
the current fiat system (which is why interest is charged on borrowed money).
(13) The most important and ultimate point about gold "lease rates" is that people should
perhaps be first looking for a zig ("lease rates" shrinking and then going negative) instead
I am not sure that the drop in the price of gold is that people are selling their gold because the cost of obtaining physical gold continues to be much higher than the future prices of gold. Clearly there is not excessive amounts of gold on the market. If there were they would not have many time leased out the gold they physically have.
From what I understand there can be a balance sheet advantage to Selling gold to pump up your balance sheet for the yr even if you use leased gold to do this. I have to wonder if this drop in gold is happening for this reason and because some hedge funds are rebalancing and repositioning after having enjoyed a nice run up to a peak in the summer possibly having taken short positions on the way down.
With the EU situation the ways it is I can imagine that some of the banks may be selling their gold now for cash in hopes of buying it back in the future to get the cash they need as they kick the can down the road in a more out of sight way that the bond selling because some of these bonds sales have not been working so well.
" A gold lease, by contrast, can be treated for accounting purposes as a “non-event” under lenient guidance promulgated by the IMF and BIS. This is because the lease is undertaken with a single counterparty presumably in order to manage monetary reserves and is therefore considered an operating instead of financing activity. " - more hinky accounting to make the situation seem less disasterous or somehow kick the can down the road out of the pubic's eye?
Some are calling for much lower prices for gold in the $1400 and below. I have to say I doubt it because with all the QE that has been going on to kick the can down the road the massive money printing is going to catch up with the markets.