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Virtually every parent will have heard those words from a deeply frustrated small voice in the back of the car … similarly any bullion dealer from investors bemoaning gold’s sideways price action, despite some pretty alarming noises from the news stations.

In July we pointed to the surrender of about 700 tonnes of stale speculative longs on COMEX here ... to a more recent (and almost unheard of) net short position of about 220 tonnes. 

We later highlighted some despondency amongst physical dealers here which, as a contrarian, both issues suggested to us that the market may be nearing a turning point.  

Well another pin is falling … precious metals lease rates are tightening. Just as buying and selling affects prices, so borrowing and lending affect lease rates. If a market is undersupplied then it follows lease rates will rise, which can have a knock-on effect on prices upwards. 

Firstly, a caveat - tightness in the forwards can have a number of explanations and by extension several outcomes. Rising lease rates do however broadly suggest that the pipeline flow of metal between miner/refiner/fabricator/trader/consumer is getting thin which often presages a squeeze higher – especially if speculators are short the metal and borrowing to finance those positions. 

The gold 6m lease rates has risen from -0.65% a year ago to +0.65% today – year to date it has risen from 0% in Jan 2018 to 0.65% today – that’s still well below the 3% we saw in 2008 or the 7% we saw in 1999, but it’s a trend. A similar story is in play for silver which has risen from -1% a year ago to 0.75% today – ditto for platinum which has risen from 0.2% to 1%, while palladium has been very much in backwardation with lease rates recently as high as 16%. Markets are tightening and that’s going to put the pressure on those large speculative short positions in gold and silver. 

Tight markets alone are rarely sufficient to lift the prices other than in the short term … but its  certainly “constructive” especially when weighed with other bullish factors.

If nothing else it will concentrate the minds of the 544 tonnes of (record) short gold positions on COMEX – especially as year-end nears and the potential exit narrows.  

So to the small voice in the back … yes, we are nearly there … but please just be patient. 

Ross Norman


Sharps Pixley Ltd


19 Sep 2018

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