Gold borrowing costs hit post-Lehman high

July 10, 2013 07:15 AM

Today’s AM fix was USD 1,252.25, EUR 977.02 and GBP 840.78 per ounce.

Yesterday’s AM fix was USD 1,252.00, EUR 972.58 and GBP 840.95 per ounce.

Gold rose $11.90 or 0.9% yesterday and closed at $1,248.40/oz. Silver climbed 0.8% or $0.16 and closed at $19.22.

Gold Prices / Fixes / Rates / Vols

Gold is little changed near a one-week high, and is marginally higher in dollars as the dollar has retreated from a three-year high, and higher in most currencies.

The gold market continues to digest the ramifications of gold borrowing costs surging to the highest since the post-Lehman Brothers scramble for gold bullion.

Gold Forward Offered Rates (GOFO) or the cost to borrow gold remains negative and overnight the 1 month GOFO has gone from -0.106% to -0.11167%. Other durations eased marginally.

The lack of liquidity in the the interbank London Good Delivery gold market (400 ounce gold bars) has pushed gold forward rates, known as “gofo”, into negative territory, meaning that gold for future delivery is trading at a discount to physical market prices – a rare situation that has occurred only after the Lehman Brothers collapse and near the bottom of the gold market in 1999.

The last time forwards were negative was in November 2008, when a scramble for physical gold led a sharp price rally of 46% from $682/oz to over $1,000/oz between October 2008 and February 2009. first reported the development Monday and looked at it again overnight. It has also been covered by the Financial Times, Bloomberg and Reuters.

The reportage is somewhat contradictory with some commentators suggesting that the record borrowing costs was due to an increase in supply. The opposite is more likely the case given the fact that there are growing supply issues in Hong Kong and China (see below).

The increase in gold borrowing costs is likely due to a lack of supply of large 400 ounce bars as mints, refineries and jewellers internationally and especially in Asia are scrambling to secure supply.

Last quarter’s record slump is leading to continued physical demand especially in Asia. China in particular continues to see record demand and premiums on the Shanghai Gold Exchange are now at $24 over spot (see table above).

Cross Currency Table - (Bloomberg)

The feverish buying has left many of Hong Kong’s banks, jewellers and even its gold exchange without enough yellow metal to meet demand according to the FT.

In mainland China, the Shanghai Gold Exchange saw record volumes on Monday, while queues formed outside some jewellery shops in Beijing.

China’s net gold imports from Hong Kong increased from 80 tonnes in April to 108.8 tonnes in May or a 35% increase and May was the second highest total on record.

China is set to become the world’s No. 1 gold buyer this year – and it may be already. So far net imports through Hong Kong for the first five months of the year have totalled over 413 tonnes – double those of a year earlier when China imported just over 830 tonnes in the full year.

China’s domestic gold consumption was 776.1 tons in 2012, down from 779.8 tons the previous year, according to the producer-funded World Gold Council.

The world’s largest jewellery group, Chow Tai Fook Jewellery Group Ltd. (1929) posted a 48% gain in same-store sales for the first quarter.

Support and Resistance Chart

Jewelers in China and throughout Asia are benefiting from soaring demand for gold products after the recent price falls. This has led Chow Tai Fook and jewellery outlets having to buy gold bars and rebuild gold inventories.

Retail sales of gold tripled across China after the mysterious “flash crash” of April 15-16 when gold fell 10% in two days. Demand has remained robust and the recent weakness has seen continued demand.

Asia, excluding India this month, is witnessing one of the strongest waves of physical gold buying ever, with bargain hunters using the drop in prices to secure jewellery and gold coins and bars which is creating liquidity and supply issues in the global gold market.

The price gains seen post the Lehman bankruptcy in September 2008 (see chart) seem quite likely in the coming months given increasing supply issues in the gold market. The paper price may be pushed lower in the short term and therefore dollar cost averaging and gradually accumulating physical remains prudent.

About the Author

Mark O'Byrne is executive director of Ireland-based GoldCore.