As you would have noticed if you follow our daily update on Gold lease rates (available to Privateer and GTW subscribers), the shorter term (one and two-month) rates have actually gone into negative territory this week. We do not recall a previous instance of this, and there certainly has not been one since the Gold bull market began in 2001-02.
On March 26, one and two-month lease rates as set by the London Bullion Metals Association (LBMA) stood at 0.175 percent and 0.196 percent respecively. On March 27, these rates had dropped to MINUS 0.018 percent and 0.088 percent. And as the week closed on March 28, the rates were down to MINUS 0.075 percent and MINUS 0.018 percent. What should be noted is here is that this descent of the short term rates into negative territory choked off Gold's rally this week and then, on March 28, sent it into sharp reverse as the spot future Gold price close dropped $US 18.20 on the day.
On the surface, this dip into negative territory by Gold lease rates, especially at the short end, does not seem like such a big deal. The one-month rate did spike up to 0.50 percent momentarily last December, but that's as high as it has been throughout the bull market. So far this year, the rate has only spent one day above 0.30 percent and has spent most of the year at or below the 0.20 percent level. In (you should pardon the expression) short, it has cost the "bullion banks" very little to borrow Gold (or Silver) for a long time now.
But true as that may be, 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. We know that the demand for leased Gold has just about dried up from the Gold mining companies. We know that the bullion banks and the hedge funds they run are facing MASSIVE illiquidity problems - as witness the Bear Stearns fiasco of a week ago.
We also know that 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. Yes, we know that Gold and Silver are in long running bull markets. But those bull markets are only five or six years old. There has been a supply-demand imbalance on physical Gold with demand outstripping supply of newly mined Gold annually for more than two decades now. This has been "balanced out" by central bank leasing and central bank sales.
Throughout the fiat currency era, the suppression of Gold and silver has been an absolutely mandatory pre-requisite for the continuing function of a global financial and banking system which deals with paper backed by nothing. It has been a very long time since this supppression was done by means of actual physical sales of the metals themselves. The IMF/US Treasury Gold sales ceased in 1978-early 1979. The only episode of official physical Gold sales since then has been the disastrous Bank of England Gold "auctions" which began in July 1979 and ended with in March 2002. This almost exactly spans the almost three year "bottom" on Gold from which has risen the current bull market.
There was surely a clear and present danger to the central banks and the fiat money financial system when Gold reached and briefly exceeded the $US 1000 level less than two weeks ago. The simple change from a "three figure" price to a "FOUR figure" price will, if maintained, attract a lot of very unwelcome attention. Even worse, the crossing of such a threshhold always re-orients the observers of any investment from looking at where it has come from to looking to where it is potentially going. Every US Dollar that Gold goes above $US 1000 increases the potential of a sudden and unmeetable demand for the actual physical metal, rather than the paper claims to Gold which have been utilised so successfully for so long by the central banks to suppress the metal.
This week, the situation has become so acute that the central banks, the suppliers of Gold to the lease rate market, have had to resort to actually paying the borrowers to borrow the stuff. It will be fascinating to see if this negative yield goes further forward along the yield curve in coming days. If it does, the "snap back" into positive territory for Gold lease rates is almost certain to be spectacular. And every spectacular rise in Gold or Silver lease rates is accompanied by a spectacular rise in the metals themselves.
Two weeks ago, the chart stood at $US 995. Last week, we added the $US 1000 "X" - and that is as far as Gold got. With the $US 84 sell-off on March 19-20, the chart reversed all the way down to the top of the previous distribution zone - that's the first support point. And this week, the chart turned right at that support point when Gold closed above the $Us 945 level on March 26.
(Chart appears here in original analysis)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold has improved upon those January levels in all four currencies. In fact, spot future Gold closed above the $US 1000 level for the first time ever on the first two days of last week. But then came the big sell-off, and the recovery of the US Dollar. This week, the US Dollar has weakened again and Gold rebounded, until the sell-off on March 28.
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