On April 19 this year, we did a piece on Gold lease rates. It's time to do another one.
If you are a Privateer or a GTW (Gold This Week) subscriber, you can take a look at the raw data on Gold lease rates and at the charts on our regular daily update. On Friday, October 11, this data was quite startling:
That's a HUGE jump in lease rates, admittedly from VERY low levels, and the biggest jump is in the shortest-term rates. Here are the percentage gains on Oct. 11 for the various rates:
If you take a look at the 2002 lease rate chart, you can see that there was a minor spike last February, around the time when Gold was breaching the $US 300 level for the first time in 2002. But this spike proved short-lived. Now, we have a second one. But for this lease rate spike to signal the kind of Gold surge that the lease rate spike of September 1999 signalled, we are going to have to get an "inversion". An "inversion occurs when short-term interest rates climb above long-term ones.
What has come to be called the "Washington Agreement" was a bombshell dropped by the European Union, in Washington, on September 26, 1999. That was on the weekend following a G-7 meeting and preceeding an IMF/World Bank meeting. This bombshell came in the form of an announcement by the EU that they had agreed not to expand their Gold leasings and their use of Gold futures and options over the next five years (ie, till September 26, 2004).
The effect was instantaneous, over the two trading days of Sept. 27-28, Comex spot future Gold soared $US 41 or 15.4% from $US 267 to $US 308. The day after that, Sept. 29, the one month Gold lease rate spiked from 4.51% to 9.93%.
The history of the Gold price, and of Gold lease rates, leading up to the Washington Agreement spike is interesting. On August 25, 1999, spot future gold hit a post 1979 low closing level of $US 253.00. A week later, on September 1, 1999, Gold lease rates "inverted". On that day, the one month lease rate was 3.295% and the one year rate was 3.253%. This "inversion" continued unbroken for exactly a month, until October 1, 1999. Towards the end of that month came the "Washington Agreement" and the Gold price spike. By the end of October 1999, the one month lease rate was all the way down to 1.1%, the one year rate was just below 3.00%, and the Gold price was back "safely" below $US 300.
The Washington Agreement Gold spike was the first sign that the post 1996 $US Gold bear market had found a bottom. The bottom was not confirmed until April 2001, when spot future Gold began to rise from its $US 255.60 spot future close set on April 2. The Gold bull market was not confirmed until Gold consolidated ABOVE $US 300 in March/April 2002. But the LAST confirmation of a long-standing bull market in Gold still awaits a DECISIVE break of the "Washington Agreement" Gold spike high.
The Washington Agreement intraday spot future Gold high was $US 327.50 set on October 5, 1999. The 2002 spot future Gold intraday high (so far) is $US 329.70 set on June 4, 2002. That's only $US 2.20 above the October 5, 1999 intraday high. And THAT'S why most competent Gold analysts point to $US 330 as the VITAL breakthrough point for spot future Gold to FINALLY confirm the bull market.
Lease rates "inverted" and spiked in September 1999, signalling the end of the bear market. They "inverted" and spiked again in February 2000, when Gold made another short-lived rally above $US 300. Since then, there has been no major spike, nor inversion, in Gold lease rates.
When the one month lease rate regains all its losses since February (and the one year all its losses since June) in ONE DAY, one can safely say that lease rates have spiked. Whether this "spike" is to be more than a one-day wonder is not yet known. And, of course, lease rates have not (yet?) inverted, the one month rate remains below the one year rate.
The big difference between now and late 1999 is, of course, that then, Gold was in a bear market and the paper markets (specifically the stock markets) were on the verge of their last great blow off. Now, despite the latest stock market rally of Oct 10-11, world stock markets are mired in a bear which is beginning to rival the one of the 1930s and Gold is in a bull market, lacking only a decisive penetration of its late 1999 highs.
As you know, Gold fell this week as US and world stock markets rallied. Now, all of a sudden, Gold lease rates spike. There are several possible reasons as to why they spiked, but the thing to watch for is whether the spike continues and especially, whether the short-term rates bounce above the longer-term ones as they did in 1999.
If that happens THIS time, with Gold no longer in a bear market as it was in 1999 but having built a HUGE market bottom up until April 2001 and having been in an unbroken uptrend since then, the danger to the paper powers that be becomes acute. Gold leasing has been the number one mechanism for "controlling" the Gold price. Lose that, and the Central Bankers have little or nothing else they can fall back on. Lease rates may be about to become VERY interesting. Keep your eye on them.