The golden subprime swan

Cardiff made a nice point on Tuesday that financial innovation, much like evolution, always finds a way. We have stressed before that that’s because risky lending — i.e. lending to the most distressed who are prepared to pay for it the most — also always finds a way.

So, in what form did the most recent spell of risky lending take place in? Read more

Pawned out

Remember when it was all the rage to be a pawnbroker?

This was when the gold price was either soaring or stable. When there were more people happy to buy gold than lend against it, and when anyone prepared to lend against gold could generate a good yield.

Not so much anymore. Read more

The hand of GOFO strikes again

The gold market is abuzz with the news that gold forwards (GOFO), otherwise known as the gold lending rate, have returned to negativity this week. It’s significant because the last time this happened was in 2008 (click to enlarge):

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A gold margin call

From Ben Traynor’s commentary at BullionVault on Friday:

CME Group, which operates the New York Comex exchange on which gold futures are traded, announced yesterday it is increasing margin requirements on gold trading by 25% to $8800 per 100-ounce contract. The new initial margin requirement will come into effect after close of trading today. “That is definitely affecting gold,” says Joyce Liu, investment analyst at Phillip Futures in Singapore. “For those who cannot put out margin calls on time, they will be squeezed out even when they don’t want to get out.”

Worth pondering is how all of this now affects the “cash-for-gold” trade. Read more

Pump up, debase

Despite all the talk of rampant physical precious metals buying, in dollar terms it’s only getting worse for the “gold HAS INTRINSIC value” brigade.

Another way of looking at it, of course, is that the dollar’s value is being rebased. Read more

Man walks into a gold bar. Au!

FT Alphaville participated in a “Gold Bulls vs Bears” event hosted by the Association of Mining Analysts (AMA) on Wednesday.

The motion being discussed was:

Is gold’s role as a safe haven asset in the global financial system outdated and redundant and if the ubiquitous QE programs have been successful and the global economic upturn is confirmed, the price of gold will continue to struggle?

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Gold, backwardation and the ‘time cost of money’

The gold market has always been partial to “carry trades”. But in the post 2008 world the nature of the carry-trade has changed.

In collateral terms, whereas gold mostly traded on “special” terms before 2008 — because you had to pay to borrow it — meaning it was privy to more of a “stock lending” profile, post 2008 it went fully into “collateral” mode. Read more

Cash-for-gold at negative rates

The conspiracy channels continue to make a big deal about the backwardation of gold — which is a situation in which gold prices for today are higher than for tomorrow. The thinking is that this must indicate rampant demand for physical gold.

In reality, since gold is a highly financialised commodity, the backwardation signal doesn’t actually indicate the bullishness they imply it does. Rather, it suggests something entirely different: that interest rates in conventional money markets are turning increasingly negative. Read more

Gold as collateral, not stock

There’s been a lot of speculation about what really drove the volatile gold price move this month. Some are still defiantly searching for conspiracies or under-handed activities by authorities.

But it’s probably Nouriel Roubini who has provided one of the best and most logical explanations. In his opinion every bit of the gold move can be explained by shifting inflation expectations. Read more