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Rennies,
"It has been a wild ride... let’s hope we get to ride off into the sunset as winners!"
The gold leasing rates tell a tale. In 1999 and 2001 the one month gold forward lease rate spiked to 5% and 6% respectively as bullion banks borrowed gold to dump on the market (gold spiked down to ~$250 per oz both occasions). Recently this lease rate spiked again to 2.8% and may continue higher. As soon as I saw the rates climbing I suspected we could see a dump and that’s what happened last night with gold falling $100 in 12 hrs.
There’s no point grumbling about it though. Central banks own the gold and can do whatever they want with it. But as each year passes they lose control as gold passes from their vaults into private hands.
There is another important factor this time too. Previously central bankers lent gold to the bullion banks and the gold producers themselves took the other side of these transactions in the form of hedges or forward sales programs. Bullion banks knew they could safely replace the borrowed gold because the heavily hedged gold miners were the counterparties via their future production. What a cunning plan and dumb-a$$ miners fell for it hook line and sinker!
But how are bullion banks going to return this gold today? Gold miners have rolled back their hedge programs and are no longer entering new contracts with the banks. Hence bullion banks will need to buy gold on the open market to return gold they are now borrowing from the central bank vaults.
A lot of patience is required but I’m sure we’ll be winners in the end – it may just take a few more years; hopefully not but I'm mentally preparing myself.
Rowingboat.
