Gold lending rates remain in backwardation as physical demand improves

Otmane El Rhazi from The Bullion Desk.

Lending rates for gold for forward delivery have remained largely in backwardation as physical demand in Asia expands at weaker prices, which are subdued in the wake of the festive season.

Spot gold, which is now hovering around $1,185 per ounce, has found support from a spike in physical demand in China before the end of the calendar year, with premiums on the Shanghai Gold Exchange climbing to $5-6 over spot prices from lows of $1-2 at the start of December.

While current premiums are dropping slightly, uptake on the cheaper price still remains, suggesting that China’s sensitivity to the gold price is still strong.

Further take-up may also be seen during the first few weeks of 2015 on buying ahead of the Chinese New Year in February, an auspicious period to purchase gold.

For the week ending December 19, gold delivered from SGE vaults reached its highest in nearly a year at 61.6 tonnes, bringing the overall year-to-date figure up to 2,016 tonnes.

Brent crude oil continues to decline and has hit a new five-year low at $57.88 per barrel – it started the year around $110.

The continual decline comes after a warning last week from the Saudi oil minister that OPEC will not cut production from 30 million barrels per day, even if the price falls to $20 a barrel.

In the forwards, one-month gold at -0.065 percent over spot is up following the -0.09 percent backwardation seen on December 24, its widest backwardation in three weeks. The curve narrowed to -0.0475 percent backwardation over two months, while three-month metal is up slightly at 0.0275 percent.

Six-month gold remained in contango, albeit fractionally, at 0.02 percent, as did the one-year rate at 0.135 percent.

The London Bullion Market Association (LBMA) has decided to scrap the GOFO rates after two more parties indicated that they might no longer wish to participate, it has confirmed. The final rates will be published on Friday, January 30.

Société Générale is the second rate-setting member this year to exit the process following Deutsche Bank in January. Under LBMA rules, the minimum number of members is six.

The market-making members of the LBMA – the Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank and UBS AG – set the GOFO rate.

Every day at 10:30 UK time, these contributors register the rates at which they are prepared to lend or swap gold against US dollars. Quotes are made over one, two, three, six and 12 months.

The highest and lowest quotes for each period are discarded and the remaining rates are averaged.

(Editing by Martin Hayes)

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