Gold Borrowing Costs Hit Post-Lehman High

Recent articles posted by GoldCore and ZeroHedge show that Gold is changed near a one-week high, and is marginally higher in dollars as the dollar has retreated from a three-year high, and higher in most currencies. The gold market continues to digest the ramifications of gold borrowing costs surging to the highest since the post-Lehman Brothers scramble for gold bullion.

The lack of liquidity in the the interbank London Good Delivery gold market (400 ounce gold bars) has pushed gold forward rates, known as “gofo”, into negative territory, meaning that gold for future delivery is trading at a discount to physical market prices – a rare situation that has occurred only after the Lehman Brothers collapse and near the bottom of the gold market in 1999.

What is GOFO (Gold Forward Offered Rates)?
GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods.

Who provides the rates?
The contributors are the Market Making Members of the LBMA: The Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Société Générale and UBS AG.

How are the GOFO means established?
At 10.30 am London time, the Reuters page is cleared of all rates. Contributors then enter their rates for all time periods. A minimum of six contributors must enter rates in order for the means to be calculated. At 11.00 am, the mean is established for each maturity by discarding the highest and lowest quotations in each period and averaging the remaining rates.

The reportage is somewhat contradictory with some commentators suggesting that the record borrowing costs was due to an increase in supply. The opposite is more likely the case given the fact that there are growing supply issues in Hong Kong and China.The increase in gold borrowing costs is likely due to a lack of supply of large 400 ounce bars as mints, refineries and jewelers internationally and especially in Asia are scrambling to secure supply.

The feverish buying has left many of Hong Kong’s banks, jewellers and even its gold exchange without enough yellow metal to meet demand according to the Financial Times. In mainland China, the Shanghai Gold Exchange saw record volumes on Monday, while queues formed outside some jewelry shops in Beijing.

China’s net gold imports from Hong Kong increased from 80 tonnes in April to 108.8 tonnes in May or a 35% increase and May was the second highest total on record. China is set to become the world’s No. 1 gold buyer this year – and it may be already. So far net imports through Hong Kong for the first five months of the year have totalled over 413 tonnes – double those of a year earlier when China imported just over 830 tonnes in the full year. China’s domestic gold consumption was 776.1 tons in 2012, down from 779.8 tons the previous year, according to the producer-funded World Gold Council. The world’s largest jewelry group, Chow Tai Fook Jewellery Group Ltd. (1929) posted a 48% gain in same-store sales for the first quarter.

Sources: Zero Hedge, Gold Core, Financial Times