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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
Silveraxis.com
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