Wednesday, June 4, 1997
Trendline
Gold lease rate spikes higher
By BUD JORGENSEN
The Financial Post
A break higher for gold lease rates is a bullish sign for
bullion prices.
Gold bugs are an endangered species, but lease rates
for gold and silver suggest that something is stirring in these markets.
Gold leasing, which is mainly done by big money-centre banks and central banks, is part of
the explanation for weakness in gold prices. Hedge funds can lease gold and sell into the
market, then invest the money at higher rates, typically in eurodollar deposits.
Similar plays are made in the silver market, and silver lease rates also have gone up in recent
days.
There is a good pickup in yield for hedgers when the three-month gold lease rate is around
1% and three-month eurodollar notes are paying more than 5%.
When the price of gold is falling as well, a hedge fund gets a double benefit because the
leased gold is returned at a lower price. This situation reverses when lease rates and bullion
prices rise.
The London market's close for a three-month contract was 1.153% yesterday, up 15 basis
points. Gold for cash delivery still is close to a cyclical bottom. The market has shown signs of
life since the beginning of May but the price was down yesterday by US70› to US$343 in
New York.
Bank Credit Analyst, a Montreal-based research agency, says in its latest market report that
"there have been some encouraging technical developments which suggest that gold may have
formed at least an intermediate-term bottom."
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