THE RELATIONSHIP BETWEEN GOLD LEASE RATES AND GOLD PRICES
By Walter Kurtz, Sober Look
Since the post on gold lease rates back in December, a number of Sober Look readers have asked whether there is a long-term relationship between gold lease rates and gold price. Based on the weekly data available, there is none. The scatter plot below shows weekly moves in gold futures price vs. weekly moves in 3-month gold lease rates since 6/29/2007.
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| Source: Bloomberg |
The R-squared, which shows the proportion of variance in gold price explained by moves in lease rates is 0.008. Daily data shows no significant relationship between the two either.
One would think that higher lease rates should provide support to gold price because a commodity that could be leased at a higher rate should be worth more. But that assumption is not supported by the data. In fact the recent moves demonstrate somewhat of an inverse relationship.
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| Recent data (source: Bloomberg) |
The rationale for this inverse relationship is fairly simple. As more investors put short positions on, there is higher demand to borrow the metal (one needs to borrow an asset in order to short it), driving up lease rates. Many gold investors have been shorting gold using forward or futures markets to hedge their holdings. But dealers who buy forwards from these investors end up shorting physical gold to become neutral. The end effect is the same – large volumes of gold shorting should translate into higher lease rates. The recent weekly data shows a correlation of -0.6 (R-squared of 0.4).
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| Recent data (source: Bloomberg) |
Whether this recent relationship holds going forward remains unclear. But based on historical data, the correlation should revert back to zero over the long run.
3 Comments
Gold Miners are ripping your face off!
@ 11:00 someone just got blown out or the man with the beard just called a prop desk over at KKR.
Anybody at instinet want to bless us with WTF is going on here. How do the minors rip and pull this reversal in the market.
This seems like as good a post as any to opine on the following.
I often hear that gold is a bad investment because it doesn’t pay interest but cash does.
But cash does not pay interest unless you lend it for a period, and gold lease rates perform a similar function.
Great article. Interesting to see the correlation between the two.