Last Updated : 02 July 2013 at 18:40 IST
'Gold covering' and the price paranoia: Why $50,000 Gold is nothing!
Source :Commodity Online Editorial Desk
Author :Rakesh Neelakandan
The matter goes out of control when the person who has leased out the gold turns out to be a Central Bank. The Central Banks which have gargantuan reserves in gold have not parked it idle locked away in bullion vaults. They lease gold and the kind of amount they lease is almost a state-secret! What would they do when they find it out that gold has sky-rocketed to insane levels and they could not get that gold back?
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Gold leasing has been a process ongoing for many years, perhaps since immemorial times. It involves a process. You lease gold from a major bullion holder and promise to give the holder the exact amount of gold back at a different point in time. However it entails a cost and that is termed lease rate.
Now, you know that spot prices of gold is ruling high compared to futures. You sell the leased gold in the spot markets and buy an equivalent futures contract, so that you can not only earn a decent profit on spot deal but also ensure delivery on futures deal. When the futures contract matures, you can take the delivery from the Comex or whichever exchange from which you bought the futures and give it back to the person who leased.
Now, this type of trade is least attractive when the markets exhibit normal conditions. You can even otherwise play the futures well and make money. However, reports suggest that the gold lease rate is now exhibiting a positive correlation with gold cobasis (means spot price premiums) which means activities in the lease front—selling the leased gold in futures and buying from exchange—is particularly robust.
Add to this, the recent decline in Comex gold inventories and the picture becomes clear. Leasing and selling is progressing substantiallly well at least after a gap of 10 years.
However, this means something more. What would happen when somebody defaults on a lease? What if the one-who-leased is no one else other than Central Banks?
This scenario would mature in the event of a gold price rally. If you have bought gold and leased it to some one else in generous terms, would you rather not want it back when the value of the gold has already sky-rocketed to insane levels? (We already know that gold and silver futures are about to rally to levels we have not seen before.)
The question is if someone would be kind enough to give the gold back to you despite he/she has promised to do so as per the lease agreement in the event of an insane rally. Highly improbable!
The matter goes out of control when the person who has leased out the gold turns out to be a Central Bank. The Central Banks which have gargantuan reserves in gold have not parked it idle locked away in bullion vaults. They lease gold and the kind of amount they lease is almost a state-secret!
What would they do when they find it out that gold has sky-rocketed to insane levels and they could not get that gold back? Ask the respective government to wage a war? That would mean declaring a war not only on the lessee, but also on the innumerable traders across scattered geography.
A prudent and easier way out is to buy all the gold out there in the market, a kind of gold covering. That single action would take the price of gold to paranoiac levels. That is why it is too scary to read this article by Chris Martenson.
Simply be ready for it! $50,000 gold is nothing! (email@example.com)
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