Gold Borrowing Costs Advance to Highest in 4 1/2 Years in London

The cost of borrowing gold climbed to a 4 1/2-year high in London at a time when record sales by investors mean prices are poised for the biggest annual decline in more than three decades.

The one-month lease rate rose to 0.2988 percent, the highest since Dec. 18, 2008, from 0.2578 percent yesterday, according to data compiled by Bloomberg. The rate is derived by subtracting the gold forward offered rate, which turned negative yesterday for the first time since November 2008, from the London Interbank Offered Rate.

Gold slid 25 percent this year, wiping $61.3 billion from the value of gold exchange-traded product holdings, after some investors lost faith in the metal as a store of value. While banks from Goldman Sachs Group Inc. to Credit Suisse Group AG forecast more declines, the drop to a 34-month low in June spurred an increase in physical buying. A scarcity of metal liquidity in leasing can lead to high lease rates and negative forward rates, the London Bullion Market Association says.

“Part of it could be to do with availability of physical metal owing to strong demand still seen in Asia,” James Moore, an analyst at FastMarkets Ltd. in London, said today by phone. “We’ve seen gold come under quite a considerable selloff and it may be the fact that there are new shorts in the market and those shorts need covering as they get rolled forward.”

Gold Price

Gold for immediate delivery rose 1.3 percent to $1,252.66 an ounce by 3:24 p.m. in London. It reached $1,180.50 on June 28, the lowest since August 2010, after rallying for 12 consecutive years. This year’s drop is set to be the most since 1981. It’s the third-worst performer this year in the Standard & Poor’s GSCI gauge of 24 commodities, behind corn and silver.

Prices slumped a record 23 percent in the second quarter as the Federal Reserve said it may slow bond buying this year. Investors sold 638.2 metric tons of gold through ETPs this year, data compiled by Bloomberg show. The 1,993.8 tons now held is the lowest since May 2010.

Gold “has been supported by reports of strong physical buying in China,” Marc Ground, a commodity strategist at Standard Bank Plc in Johannesburg, said today in a report. “Reportedly, some retailers ran out of gold bars and gold jewelry over the weekend. This is encouraging news in a beleaguered market and might see physical market buying re-establish the $1,250-an-ounce support level.”

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