this may be HUGE - Silver lease rates

[Spartacus]

or it may be nothing

http://www.kitcosilver.com/charts/silverleaserate.html

Silver lease rates are decisively negative (I'm assuming this is not a software glitch), entry error, and so on - it may be one of those.

NOTE that the lease rate is not an absolute amount, but a discount to LIBOR - (negative lease rates, If my figuring is correct, means that Silver leases are at a premium to LIBOR).

Kitco used to have a 20 year chart, which never, ever went negative.

thebulliondesk.com is sort of confirming
http://www.thebulliondesk.com/tbdcha...de=XAG&chart=D

(one of the selectable charts is for lease rates)

[Guest]

Re: this may be HUGE - Silver lease rates

Spartacus -

I posted on that too (very much interested in the issue as well) -

See 09-14-07 post - time stamped 05.02 PM here:

http://www.itulip.com/forums/showthr...16009#poststop

I've noticed the silver lease rates are DIVING also.

Good catch.

[Spartacus]

Re: this may be HUGE - Silver lease rates

I have to get in the habit of searching before posting

I had this post ready last week butI didn't want to post because Kitco charts have sometimes had significant short term errors in various numbers, in Gold, Pt and Silver.

And the source of the numbers, LBMA, completely disavows any responsibility for the numbers -
the lease rates are charted from the bottom right hand numbres here

http://www.lbma.org.uk/statistics_current.htm

what's charted is "libor - sifo"

Since this is the first day that thebulliondesk.com kind of confirms, I thought it would be a good time to post, and it's a big enough issue to be at top level.

Spartacus -

I posted on that too (very much interested in the issue as well) -

See 09-14-07 post - time stamped 05.02 PM here:

http://www.itulip.com/forums/showthr...16009#poststop

I've noticed the silver lease rates are DIVING also.

Good catch.

[Guest]

Re: this may be HUGE - Silver lease rates

Spartacus -

There was a reference to this guy Tom Szabo [silveraxis.com] who goes on a bit about the silver 'basis'. He's pointed out that a plunging silver lease rate and / or a rapidly shrinking 'basis' are closely associated with nearby large potential movements in the metal.

Bart looked at it and found the correlation equivocal at best, at least as it involves 'basis' correlation with price moves.

I don't fully grok all of this, but my sense is there's something tucked away here that's quite relevant indeed. Certainly in the silver market, leasing is a very big deal. Remove incentives for leasing and you destablize the paper silver trade.

The lease rate is moving down very sharply, in curious synchronicity to some very significant breakouts in the metals last week. What's your read (or are you keeping it under your hat)?

[Spartacus]

Re: this may be HUGE - Silver lease rates

IMHO, Something is rotten in the state of Denmark.

The big 20 (?) year chart I mentioned showed that the 1997 Buffett purchase forced charted lease rates to 80%.

And when the ETF was just coming in, lease rates went up to 6%, from a decades long 1% base (except for the Buffett incident)

Something weird is going on. Buffett's purchase obviously put stress on the system and Silver should have become less available. If it was less available, why would Silver owners be lending it out at LIBOR minus 80%, or LIBOR minus 8,000 basis points?

One would have thought that at a time when silver supply seemed to be in severe crunch mode, the lease rates would soar far above LIBOR

so I don't know - what Szabo wrote did make sense, and the LBMA site numbers I've been following for 2 years match the charts.

if he turns out to be correct and negative rates indicate extremely tight physical supply then those earlier episodes make absolutely no sense.

OTOH, there are reports of physical silver being withdrawn from the ETF for industrial use, which backs up the tight supply theory.

Spartacus -

There was a reference to this guy Tom Szabo [silveraxis.com] who goes on a bit about the silver 'basis'. He's pointed out that a plunging silver lease rate and / or a rapidly shrinking 'basis' are closely associated with nearby large potential movements in the metal.

Bart looked at it and found the correlation equivocal at best, at least as it involves 'basis' correlation with price moves.

Looking at the site, it looks like basis is something wholesalers and actual industrial users may actually use - but since a huge (perhaps the vast majority?) of traders are not insiders with warehoused stock, I don't get why Szabo thinks this should apply to the industry as a whole. looks like fallacy of composition

I don't fully grok all of this, but my sense is there's something tucked away here that's quite relevant indeed. Certainly in the silver market, leasing is a very big deal. Remove incentives for leasing and you destablize the paper silver trade.

The lease rate is moving down very sharply, in curious synchronicity to some very significant breakouts in the metals last week. What's your read (or are you keeping it under your hat)?

absolute lease rates are going up - the chart is going down ; )

I have lots of Silver investments - I've written before I'm very nervous about it (and you replied I shouldn't be) - this is what makes me nervous about Gold and especially about Silver - so many conundrums and dilemmas, like there are metaphorical trap-door spiders about to jump out and grab you at any moment.

I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?

I can't see how they make a blanket statement like this.
IMHO You need a decision tree to draw this conclusion -

if credit becomes tight, AND IF there is lots of leverage long Gold ( AND IF that will be forced to de-leverage) in Gold and Silver then ...
if credit becomes tight, AND there is little leverage long Gold and Silver ...
if credit becomes tight, AND there is lots of leverage short Gold and Silver ...
if physical supply becomes tight at the same time as credit, AND there is lots of leverage ....
and so on

EDIT: adding
OK, having read the Szabo stuff, it seems to me that with respect to GOFO/SIFO he's making too big a deal out of future gold prices. I would think that lease contracts have a built in mechanism to account for changes in the value of the underlying. It's pretty common to have adjustments of this type. Why leave that kind of thing to fortune telling when you can easily write contractual terms to allow for it?

And Szabo does not make enough of a deal out of expectations of default. These are banks and other financial institutions we're talking about, after all - if Gold lease rates are rising, my first expectation is that the leasers think they won't get their Gold back, not necessarily that they expect the price of Gold to rise in the near future. Just like house prices - higher risk of foreclosure, higher rate.

[raja]

Re: this may be HUGE - Silver lease rates

Can someone please explain what silver lease rates are, and the possible significance of these lease rates diving?

Coincidentally, I bought some SLV just today . . . and I'm wondering if diving lease rates is a good or bad omen.

[Spartacus]

Re: this may be HUGE - Silver lease rates

you can borrow Silver from a bullion bank (or from Kitco, I believe) for let's say a month

At the end of the month you give the Silver back plus a certain payment for the month-long use of the Silver. Express that "plus" payment as a percent and you have a rate, XXX% . Libor minus this XXX% is the "lease rate" that you see in the Kitco charts,

So the "lease rate" charts are misleading

So if actual Silver lease rate goes up above LIBOR, the charts will show "lease rates" as negative.

The actual lease rate for Gold and Silver are on this page.

http://www.lbma.org.uk/statistics_current.htm

The actual lease rates that the industry apparently uses are the SIFO and GOFO

The number that gets put on the "lease rate " charts is either
LIBOR - SIFO (for Silver)
LIBOR - GOFO (for Gold)

Can someone please explain what silver lease rates are, and the possible significance of these lease rates diving?

Coincidentally, I bought some SLV just today . . . and I'm wondering if diving lease rates is a good or bad omen.

The lease rates (GOFO and SIFO) are not diving, they're rising - the charted number is diving -

The significance is that maybe lots of Silver users want Silver to lease, and the leasing houses can't find enough, so they' re raising the interest rates.
OR
Silver is money, and exactly like the inter-bank rates (for electronic and paper money) are going higher, Silver, being money, is also getting higher rates

So to answer your question, IMHO buying SLV is probably a good thing ... (I'm not a financial advisor, etc ...)

[raja]

Re: this may be HUGE - Silver lease rates

Thanks for the explanation.

I was comparing GLD to SLV this morning, and SLV has not had the same relatively steady rise as GLD.

To me, this seemed like a good time to invest, because I expect silver to perform the same as gold in the long run . . . .

[Guest]

Re: this may be HUGE - Silver lease rates

Spartacus -

Quote:

Originally Posted by Lukester I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?

I can't see how they make a blanket statement like this.

______________

I didn't say I understand it. In fact I still don't. Thanks for your input.

[Spartacus]

Re: this may be HUGE - Silver lease rates

Are you overweight Gold or Silver?

Spartacus -

Quote:

Originally Posted by Lukester I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?

I can't see how they make a blanket statement like this.

______________

I didn't say I understand it. In fact I still don't. Thanks for your input.

[idianov]

Re: this may be HUGE - Silver lease rates

The way I see it is that lease rate is the relative indicator between cost of money for paper and physical metal as collateral in money markets. Both collaterals must compete for yield with markets setting LIBOR and GOFO interest rates based on supply and demand for money.

Another words, higher GOFO interest rate should follow lower LIBOR resulting in lower metal prices and vice versa, because lower LIBOR for a given term makes it cheaper for money market players to borrow cash using paper as collateral. The higher GOFO rate for the same term should attract more physical metal supply seeking higher return on asset which will bring the metal price down.

Right now, the lease rates for silver going negative indicate lower prices in the future unless money markets go crazy again.

[Guest]

Re: this may be HUGE - Silver lease rates

Idianov -

Hard to conclude Silver is used primarily for it's collateral function. I tend to think little of the silver is being employed for that purpose. That is primarily the Gold market's function. Silver offtake is constant and substantial for industrial use. Therefore it's not reliable as is Gold for collateral?

What's your read if you provisionally assume Silver were NOT being employed as collateral?

[ Note: Another large offtake from the Comex is bullion sequestered to ETF's, which is indeed a collateral but it's private small investor held, therefore behaves possibly independently of what you describe? This segment is permanently sequestering ever larger amounts of bullion each year. ]

[FRED]

Re: this may be HUGE - Silver lease rates

The way I see it is that lease rate is the relative indicator between cost of money for paper and physical metal as collateral in money markets. Both collaterals must compete for yield with markets setting LIBOR and GOFO interest rates based on supply and demand for money.

Another words, higher GOFO interest rate should follow lower LIBOR resulting in lower metal prices and vice versa, because lower LIBOR for a given term makes it cheaper for money market players to borrow cash using paper as collateral. The higher GOFO rate for the same term should attract more physical metal supply seeking higher return on asset which will bring the metal price down.

Right now, the lease rates for silver going negative indicate lower prices in the future unless money markets go crazy again.

Way back in April you said:

This is true if there is a growth recession in consumer spending and slower business cycle without excessive debt. The asset rotation happens from stocks into bonds with inflation in real economy contained. Bonds will outperform stocks. The gold will suffer. Lower rates will help to refinance consumer debt, money will move into stocks again for the next leg up.

BUT, there is debt deflation in financial economy because of RE bubble, which will be hyper inflationary in real world economy. The smart money will not move into bonds and it will take a long time to unwind. For example, the leg down in subprime ABX at the beginning of the year has wiped out 5 years of income.

There are signs of slowing foreign capital inflows into US in anticipation of debt deflation. The falling US dollar against other currencies could be a sign of orderly capital outflows. The money are looking for assets around the world causing asset inflation in both real and financial economies. The parabolic M3 growth, world stock bubbles and accumulation of forex reserves abroad is the confirmation of the stress in the US financial system and accelerated inflation world wide. I expect the foreign investors and institutions (including CBs) to drive the gold demand in exchange for cash.

The correlation between US bond and gold is based on my observations of RE and US bond tops in June 2005 which started the KA and the major leg up in gold into May 2006. At the end of KA, the bonds rallied while gold fell hard and have been consolidating until Dec 06. The bonds fell in Dec 2006, which coincided with the start of subprime defaults. At the same time, the gold rose from $600 to $690 until Feb 27th. The recent hesitation at $700 is not a surprise, because the bond has been rallying on retail investor demand in anticipation of a normal slow down.

The debt defaults are far from over and they will accelerate with rising unemployment in US recession, rising inflation, ARM resets in the summer 2007. I could be wrong, so I am closely watching US 30 year bond for further direction.

Looks darned prescient to me!

[idianov]

Re: this may be HUGE - Silver lease rates

Lukester,

Any asset can be used to raise cash by selling it or borrowing money against it. When credit party stops, the most liquid assets will be used by banks to borrow cash (i.e. T-note, Gold, Silver) while less luiqud and more risky assets (i.e. Stocks, Junk Bonds, ABX, CP) will be sold into market.

There are so many players in the market driving supply and demand for Silver, so the Silver ETF alone cannot be used in isolation. For example, CEF buying physical Silver early September had an impact by driving the spot price higher before the announcement.

Gold and Silver lease rates also seem to behave in a different way. The Gold lease rates hardly buldged during the previous top in May 2006, while Silver lease rates shot up to 7%, reflecting backwardation in price structure (higher spot price and negative GOSO yield probably due to Silver ETF IPO demand) and rising LIBOR rates while the FED was on the rate hike campaign. Since May 2006, silver lease rate was falling leading metal prices lower. Silver also underperformed compared to Gold since May 2006, which is a trend until it is reversed.

GOFO, on the other hand, better tracks LIBOR being liquid monetary metal used by banks. The lower GOFO yield agains LIBOR is indicating lower risk premum compared to money markets. In normal "speculative" markets, lower yielding assets fail to attract capital causing depressed prices.

During credit rout, due to extreme risk aversion, Gold will apreciate as one of the lowest risk assets which will be used by banks to borrow cash against metal as collateral.

This process has already started in 2001 and reinforced with the crash in the secondary MBS market in 2006 where falling prices and higher yields failed to attract capital, thus, making paper worthless for anything but toilet. Watch CP, CMBS and long bond for further gold and silver market direction. Falling CP and long bond will indicate further risk aversion in paper assets which will lead the metal price higher.

Igor

[Guest]

Re: this may be HUGE - Silver lease rates

Idianov -

Thank you for your clarification.

You wrote: << During credit rout, due to extreme risk aversion, Gold will apreciate as one of the lowest risk assets which will be used by banks to borrow cash against metal as collateral. >>

In your view, what happens to Silver in such an environment? Does it remain coupled to Gold bullion, but with wider swings, or has it on occasion decoupled from Gold's preferred collateral function?