Commodities | Jul 25 2013
A lease rate is an amount of money that is paid to an owner of an asset who rents the asset out to someone. In gold, it is essentially Central Banks, the owners, who lease it out to people who require it for a multitude of purposes. It’s a way the Banks can earn some money off the asset they hold. The steepness of the leasing curve going from 1 month out to 12 months generally tells us who is in the market and or who is short and needs to cover positions. For some time we have been talking about the physical demand for the metal, which has been unprecedented, and finally, this demand is starting to filter though to the market by way of higher lease rates. As mentioned, 3 month lease rates are at 4-year high. It is not only the short end of the curve that is steepening it is the whole curve. The steepening of the curve tells us that demand is rising and that a low of importance is already in play.
The supply/demand picture for the metal is roughly seen as being in equilibrium so we can see that more potential for increased demand will out-pace supply. In 2012 total production was 4408t and consumption was 4362t so it would not take to much time for the market to swing into deficit. The interesting aspect this current market is revealing is similar to the machinations at play in the copper market. It feels that as a result of the last five years of depressed economic times, companies were very quick to cut projects and production. Thus any pick-up in demand will have a volatile reaction in the price. The copper example was perhaps a little premature as the economics are yet to unfold into increased demand, however in gold it is a different story. The lease rates are telling us that more metal is demanded and the availability for consumption is shrinking. Demand remains strong and the story to buy gold gets better, in particular as the Fed continues to print money and situations like that happening in Detroit look only to be gaining momentum. If investors start to lose confidence in the US again the USD will get weaker and the appetite for gold will only increase.
Our outlook for the metal has not changed, in fact the story seems only to be getting better. We feel that given the last two weeks' worth of price action that a low of importance is in the market and as we have managed to break back above the US1330, ie the break-down level, on a daily basis the prospects look good.
We are long at US1209 and US1275. Our initial target of US1325 has been satisfied. Our stops are in at US1180. The next targets are US1375 and US1400.
Chart Point – Gold:
Technically we see more volatility, however the price action is constructive. Any dips look positive. The interesting aspect to the market is that we are trading above the break-down level this is supportive of a market that has changed its trend. Momentum indicators are toppy but nothing has been confirmed. Stops have to go in below the old low perhaps around US1180 would be a safe area.
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