London's wholesale gold market in 'slight
backwardation' as borrowing costs rise...
LONDON'S GOLD market has "tightened
significantly" according to bullion analysts, thanks to lower stockpiles
– shrunken by continued outflows of metal to Asian buyers – running into
growing demand to borrow wholesale metal.
With the cost asked of gold borrowers rising to 0.4%
annualized on 1-month loans – the highest level since a sharp spike in March
2001 – "Gold lease rates have continued rising," notes French
investment and bullion bank Natixis, attributing the rise to "an outflow
of gold from Western investors to Eastern consumers" plus a rise in
"producer hedging" by gold mining companies wanting to sell future
output today for fear of lower prices ahead.
That means borrowing metal first, with a view to
re-delivering in future using newly mined output.
"Heavy buying in Asia," agrees Jonathan Butler
at Japanese conglomerate Mitsubishi, has depleted the London bullion market's
stockpile of metal, with the loss to world supplies of Russian mine output –
thanks to Western sanctions over the Crimea conflict – also working to
"reduce available metal in the London market, moving the forward curve
[of borrowing rates] into a slight backwardation."
More normally seen in industrial commodity markets,
"backwardation" is when prices for immediate delivery are higher
than for future delivery.
Physical gold in London's wholesale market typically
trades in the opposite position of "contango" – firstly because
storage costs (and the lost interest on cash which a holder could otherwise
earn) add to prices for delaying delivery into the future, and also because
plenty of metal is usually available for immediate supply.
Over in the leading gold consumer markets, India's demand
has now topped 100 tonnes for two months running, note analysts at RBC
Capital Markets, pointing to the recent Hindu wedding season and the
sub-continent's peak gold buying Diwali festival in October.
China's gold imports through Hong Kong, although 35% lower
year-to-date from the record levels of 2013, have meantime risen for 3 months
running on official data.
Unreported imports directly to Shanghai are also rising
sharply according to other countries' export data. Major refining nation
Switzerland has so far in 2014 sent 153 tonnes to China directly, with a
further 299 tonnes going to Hong Kong out of a total 1,372 tonnes exported
worldwide year-to-date.
The UK – where London's specialist vaults represent the
world's central storage point for wholesale bullion – has meantime exported
£15 billion-worth of gold so far in 2014 according to customs data, but
imported only £10bn.
A much greater outflow from London – central vaulting
point for the world's stockpile of wholesale 'Good Delivery' bars – was also
seen in 2013, when heavy Western investor selling met a surge in Asian gold
demand on the crash in prices.
Falling stockpiles pose a "fundamental challenge to London's dominance in bullion
dealing," BullionVault
noted earlier this year, writing in professional trade body the London
Bullion Market Association's quarterly journal. Because the price crash of
2013 - and the resulting surge in Asian premiums over and above London prices
as that region's consumer demand leapt - "incentivized a massive shift
in the world's tradable stockpiles, out of UK storage through Swiss and
Middle East refineries onto Asia."
"Interestingly" in late 2014, says a note from
South African bullion bank Standard Bank, "the gold forwards [interest
rates] have tightened significantly in spite of weak[er] physical demand and
ETF outflows" during November.
Sometimes taken as a proxy for the movements in large
investment holdings of gold, the largest exchange-traded gold trust fund – the
SPDR Gold Trust (NYSEArca:GLD) – this week shed another two tonnes of gold
from the metal needed to back its shares, falling 47% by weight from its
end-2012 peak to a new 6-year low of 718 tonnes.
Moscow's central bank has meantime been buying and hoarding
gold directly from Russian miners – the world's fourth largest
producers – because the banks and brokers they would otherwise use to sell
their output are blocked from using international markets by US and EU
sanctions over the Ukraine conflict.
Looking at the rising cost of borrowing wholesale gold in
the London market, "We note that such conditions sometimes presage a
move higher in the spot price," says Butler at Mitsubishi, "as
borrowers scramble to secure gold, although this is not underway yet."
