Gold Borrowing Costs Remain Near 4 1/2-Year High on Tight Supply

The cost of borrowing gold held near a 4 1/2-year high in London as U.S. futures moved into backwardation this month, a signal that near-term supplies are tightening at a time when prices gained on more physical demand.

The one-month gold forward offered rate, which shows the interest rate at which dealers will lend metal for dollars, has been negative since July 8, pushing one-month lease rates to 0.3067 percent on Aug. 8, the highest since December 2008. The cost of borrowing was at 0.2929 percent today, data compiled by Bloomberg showed. August futures on the Comex in New York rose above the December contract for the first time on Aug. 2.

Speculators’ bets on price declines gained eightfold since November as the metal heads for its first annual drop in 13 years after some investors lost faith in gold as a store of value. Bullion rebounded 16 percent from a 34-month low on June 28 as lower prices spurred more purchases of jewelry, bars and coins from China to Turkey.

Rising borrowing costs “could be because of demand for the metal in the short term linked to the physical market,” Ross Norman, chief executive officer of Sharps Pixley Ltd., a brokerage handling physical bullion in London, said today by phone. “When you run a short position in gold, you’re selling what you haven’t got, and therefore you need to borrow it. It may simply be a symptom of the fact that there are a very large number of shorts out there in the market.”

Gold Price

Gold for immediate delivery traded at $1,366.45 an ounce by 2:08 p.m. in London, set for an 18 percent slide this year. Prices reached a two-month high of $1,384.55 yesterday, rebounding from as low as $1,180.50 in June.

Consumer demand for gold jumped 71 percent in India, last year’s biggest buyer, in the second quarter and gained 87 percent in China, the next-largest, helping to push global bar and coin purchases to a record, the World Gold Council said Aug. 15. Prices may reach $1,450 an ounce by the end of 2013 on rising demand in Asia, according to the median of estimates in a survey of 11 traders, jewelers and analysts who attended the India Gold Convention in Jaipur, India on Aug. 16-17.

Comex futures entered backwardation, when nearby contracts are more expensive than longer-dated futures, as bullion stockpiles tracked by the bourse fell to the lowest in more than seven years on July 22. The August and December contracts were near the same price today. Sales from exchange-traded products slowed every month since liquidations peaked in April, data compiled by Bloomberg show.

Speculators’ Positions

Money managers’ bets on lower prices fell 27 percent since reaching a record on July 9, U.S. Commodity Futures Trading Commission data show. That helped increase the net-long position, or bullish wager, by 59 percent since then.

The one-month lease rate in London averaged 0.252 percent since the start of July, compared with 0.0062 percent in the prior five years. Rising rates may indicate a scarcity of metal, according to the London Bullion Market Association.

“Borrowing in the lending market can be quite complex,” said Norman at Sharps Pixley. “The borrowing market is normally cheap, simply because there’s a lot of lenders and relatively few borrowers, the lenders being central banks and the borrowers being jewelry producers, typically, and gold miners who are hedging.”

Central banks and government institutions hold about 31,910 metric tons of bullion in reserves, equal to almost 12 years of global mine production, according to the London-based WGC and Barclays Plc.

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