Gold and Silver Basis Falling

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Published : October 09th, 2008
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Category : Gold and Silver





UPDATE: Here is the Financial Times article talking about the central banks no longer lending gold: Central banks all but stop lending bullion.


ORIGINAL: I’ll try to find more time to write later, but I wanted to quickly report on the decline of the basis in both gold and silver over the past few days. Neither are in backwardation so far but the movement in that direction is probably the most significant since 2006.


Here are the gold and silver forward rates from the past several days. This is a form of basis for precious metals traded in London. A positive forward rate represents contango where the forward (future) price of gold is higher than the spot price. A negative forward rate represents backwardation where the spot price of gold is higher than the forward (future) price.


Gold Forward Rate
1-Month, 2-Months, 3-Months, 6-Months, 12-Months
01-Oct-08 2.91714 2.90857 2.91429 2.88571 2.81714
02-Oct-08 2.78333 2.78333 2.76667 2.74167 2.60833
03-Oct-08 2.70833 2.71667 2.66667 2.63333 2.52833
06-Oct-08 2.23333 2.25000 2.22500 2.24167 2.20000
07-Oct-08 1.44286 1.44286 1.43571 1.47143 1.47571
08-Oct-08 1.61500 1.61667 1.59167 1.57833 1.57500

Silver Forward Rate
1-Month, 2-Months, 3-Months, 6-Months, 12-Months
01-Oct-08 3.10000 3.11429 3.12429 3.03857 3.02571
02-Oct-08 3.19667 3.22667 3.24333 3.18333 3.04333
03-Oct-08 3.18333 3.19333 3.20500 3.13167 2.91833
06-Oct-08 2.68667 2.71667 2.72500 2.75000 2.68833
07-Oct-08 2.57429 2.62143 2.63571 2.63286 2.54714
08-Oct-08 2.52143 2.53571 2.55000 2.57857 2.51571


As you can see, the gold forward rate has declined more than silver, which may very well be due to something reported in the print edition of the Financial Times yesterday as quoted by Gold Investment in an article on Gold Seek earlier today:


The FT reports that ”central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level. Traders said the jump reflects the fact that central banks - mostly European - have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not repay their bullion loans if they are engulfed by the financial crisis.”


In the meantime, the basis in COMEX gold and silver have both fallen by a significant amount in the past few days as well, but unlike the LBMA forward rates shown above, both the gold and silver COMEX basis rates are relatively close to one another.


The discrepancy in the gold and silver forward rates on the London Bullion Market is likely due to the fact that silver “leasing” has already been largely curtailed in the past couple of years so that a cessation of new silver lending has not had a large effect. Mechanically speaking, when gold “leases” or forward contracts are no longer being rolled over, that means the borrower has to buy the gold in the spot market to return it to the lender. The result is greater demand in the spot market than the forward market. Thus the forward price declines in relation to the spot price and the contango is reduced. If the spot demand is severe enough, the price may even go into backwardation where the spot price is higher than the forward price. Should that happen — it hasn’t happened yet because forward rates in London are still position and the important active December COMEX gold and silver contracts are still in contango — we would need to seriously consider the possibility of severe or even fatal systemic monetary consequences in the immediate future.


There is much, much more to write about this topic and I was really hoping to take a bit of a break after the mega posts of the past few days but it looks like the markets are not going to give me a chance to rest, so I’ll be back later to continue updating you on the developments.


Tom Szabo

24hGold - Gold and Silver Basi...




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