Warning: This analysis contains extreme views that might be unsuited for holiday viewing.
Gold’s forward rate, a rate at which bullion can be “leased,” continues to hover near zero and is pointing to far richer prices for precious metals ahead.
The little-known figure is pointing to counter party risk among investors hesitant to transact in major currencies. As the incoming White House leaders put it this week, the public is “frustrated with the system” and might be experiencing an extreme “crisis of confidence.”
Silver’s forward rate, a way of gauging real-time demand for the metal – as in need it right now – is actually negative. This is extraordinary for a metal commodity, although it happens much more often with petroleum products and crops.
The so-called forwards can be seen each day at the London Bullion Metals Association site and in ThomWatch articles. Strategies for potential profits are discussed in the subscriber-only service Ticker Trax By Thom Calandra™.
Forward rates are virtually unknown outside the arcane world of metals leasing and dollar swaps. As the LBMA states, the rates are percentages at which gold holders and traders will lend the metal in a swap transaction against U.S. currency.
Precious metals essentially are just as valuable today, and in silver’s case more valuable, than the metals delivered a month from now, or three months from now. The near-zero forward rates can point to several scenarios:
- Counter party risk. Investors with large sums of gold, or currencies, are concerned about choppy and unpredictable dollars and other major forms of cash they receive in transactions. They might be putting a stamp of approval on gold and silver as central bankers indicate a willingness to “print money” for quantitative easing of the financial system.
Gold deliveries to futures traders in New York, Chicago and elsewhere will conclude for the year at month’s end. The deliveries are poised, says the Gold Antitrust Action Committee (www.GATA.org) and other metals observers, to strain the available supply of gold available on Dec. 31, 2008, or at the end of expiring futures contracts.
Gold and silver coins and bars/ingots are gaining acceptance as forms of currency for large transactions.
Demand for gold, which is a relatively small commodity against the scale of petroleum/coffee/wheat/cattle/natural gas, is starting to outstrip supplies that can be tapped easily.
Alternatively, very low interest rates, as evidenced by LIBOR, also could be depressing an interest rate based on a currency/metal swap. As explained to me by a quant-in-residence: forward curves track just below the money market rate curve. The gold lease rate is the difference between LIBOR’s interest rate and contango, a term which refers to the normal way commodities work: more money delivered for gold tomorrow rather than today. When the LIBOR rate is very low, because of financial stress or other reasons, gold/silver forwards are likely to be low as well.
I exchanged electronic mails Friday with a former bullion analyst whose name is known by everyone in the metals business. The former goldsmith, a kind of living legend when it comes to metals metrics and use of wonderful prose to describe those metrics, declines any longer to be quoted by name.
Any material from this person is for background purposes. As such, no quotations. I regard highly what this person, who still practices the trade of analyzing commodities markets, has to say.
Thus:the extremely low forward rates for gold and silver might be evidence that physical gold/silver markets are tight. This is occurring as gold coins are rationed. (Platinum coins and ‘junk’ silver are extremely difficult to find without large premiums attached.) Yet other commodities such as surplus cruse and base metals, shipping tankers, London Metals Exchange warehouses, are filled to the gunwales and the rafters with “stuff.”
In addition, several far-flung economists are saying that gold/silver is becoming the final good money: the only collateral acceptable in credit raising. Such a view is without doubt extreme. (ThomWatch says: But then Don Quixote’s windmills were a “stretch,” too.)
Our bullion logic in subscribers’ Ticker Trax By Thom Calandra™ and in this space is well documented. Gold is almost surely on its way to an inflation-adjusted high, which is approximately $2,500 (based on January 1980 high of $870 an ounce), depending on whose inflation figures are used. Platinum’s price might far outstrip the gold price at some point in the next two years. “Junk silver” will become the savior of consumers who still have small change they are willing to spend.
That is it for now.
Paying subscribers of Ticker Trax are now in possession of our first planetary prospect. The notice was delivered by electronic missive to the Ticker Trax audience. (See: www.TickerTrax.com.)
The third, secured issue of Ticker Trax By Thom Calandra™ also isnow available to paying subscribers.
On The Ticker Trax™
Ticker Trax By Thom Calandra™explores planet Earth for those few stakes that offer the prospect of excellent, in some cases cosmic, returns. It is for those who are entirely at ease with stratospheric levels of risk in a handful of planetary prospects. (Please see www.TickerTrax for charter sign-up.)
Ticker Trax is for those who make select investments and honor those stakes with on-spot research, patience and due diligence. Our first gathering of original members is scheduled for Vancouver in January 2009.
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HOLDINGS: Thom’s cosmos of holdings is listed for free Stockhouse members on www.Stockhouse.com under the “portfolio setting” for user TCALANDRA. He and his family also own recently minted gold coins. Thom is a long-term believer in bullion and platinum. For more ThomWatch, please click here.
THOM’S STORY:Thom Calandra helped his audience find value in a quagmire of investment choices. He also settled a valid complaint with the U.S. Securities & Exchange Commission in 2005. Thom co-founded CBS MarketWatch, MarketWatch.com and FT MarketWatch in Europe. As the voice of Thom Calandra's StockWatch and The Calandra Report, Thom fancied $300-ounce gold before that metal became an investment rage. Thom visited bioscience companies, metals mines and scores of thin-crust pie joints across the planet in a search for profit, fashion and pizze de trippa gorgonzola. Thom's novel PABLO BY NUMBERS was completed in summer 2008.