RE: Gold Leasing Rates Are Higher - Why? (Q & A Response)
From: Jim Sinclair
Date: Sunday, October 13, 2002
Question
Are gold leases rising now? If so, why?
Answer
We have to be cautious because www.kitco.com, the main web page reporting on lease rates, hasn't been consistently correct. They have reported all four of the recent four nonexistent increases in the gold lease rate. The only other source on the web reports daily hypothetical gold lease rates, which need not have anything to do with real gold lease rates. Clearly, I am not the most favored person at the gold cartel trading desks, so all I can do is ask Kitco if they got it right this time. Today is Sunday.
Therefore to answer your question, I will review for you what makes the gold lease rate rise and what is the main ingredient today that will influence the rate.
The theoretical gold lease rate is the difference between Libor (the British inter-bank rate for the period in question) minus the gold forward contangos (difference between cash and forward price of gold for the period in question up to one year). Therefore the theoretical gold lease rate formula is Libor (minus) Contango=Lease Rate.
The real gold lease rate is the above theoretical gold lease rate, plus or minus supply and demand for gold leases. It is for this reason that the one-year gold lease rate ran up to above 9% during the Ashanti Derivative Hedging Crisis.
Gold leases are therefore determined by:
1/ The Forward rate of gold for the period, the contango.
2/ The Libor inter-bank lending rate for the period.
3/ Supply and Demand for gold leases.
What is happening, now?
The forward gold rate (contango) had expanded slightly, but not enough to be a serious ingredient to higher gold lease rates.
I expect Libor to rise, but I am totally alone on that expectation. However, on the theoretical level, one could offset the other between numbers 1 & 2.
I believe any gold producer that seriously increased their derivative gold hedging via gold leases at this time -- even to finance a non-recourse gold loan for development of a new promising gold project -- would ignite a fierce stockholder revolution that could reach the proxy war level.
Supply & Demand Factors
Therefore, that leaves only the Supply Side of the gold lease equation to influence the gold lease rate. That means the willingness of the Central Banks, who are the gold lease sources, to re-grant gold leases as they all expire yearly. The supply side of the gold lease also represents the Central Banks' willingness to grant new gold leases.
However, the demand for new gold leases is now dead in the water. Therefore, higher lease rates cannot be affected by that factor of supply/demand.
That leaves only one viable possible reason for an increase in the gold lease rate.
That factor would be the lack of the willingness of some, probably not major, Central Banks to continually and into infinity renew by re-grant the gold leases that mature yearly for all eternity. It should be remembered that during the Ashanti Crisis, it was a minor Islamic central bank that declared it was willing to fill all leasing demands that broke the lease rate and in turn help gold off the $350 level! Most certainly the Central Banks representing the 28 Islamic countries planning to join in the Gold Dinar strategy of June 2003, would not renew gold leases now.
As a result of the highly publicized derivative credit downgrades made by major credit rating services on international commercial banking operations that are the gold cartel dealers, smaller central banks will be concerned about many current gold dealer' s creditworthiness. These secondary central banks will defect from the Club of Central Bankers by failing to automatically re-grant gold leases.
As a result of this possible action, the gold cartel dealers, who generally have accepted in their deals with gold lease clients the legal/financial responsibility to provide the roll-over of the gold lease for their clients, will have to seek a new gold lease elsewhere. This new gold lease demand, with a lower gold lease supply due to credit downgrade revelations, is what I see as the primary reason for any new rise in rates.
Has this occurred? We shall see, but 1.6%, the reported level even if it is factual, is still a pitifully low cost of money. Yet if it exists, it has a TA implication which would be important.
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