Source: Bloomberg – Gold Backwardation Seen by SocGen Prompting ‘Corrective Rally’
Gold’s biggest backwardation since 1999 prompted a “corrective rally” and negative investor sentiment means the outlook is still bearish, according to Societe Generale SA.
Physical gold demand is strong and “nearby tightness” will persist for the “foreseeable future,” Robin Bhar, a London-based metals analyst, said in a report e-mailed today. Gold will average $1,150 an ounce in 2014, according to the bank, which predicted the rout in April when prices entered a bear market, having fallen 20 percent from the high last year.
Bullion rallied 5.1 percent in London last week, the most since October 2011, and is heading for a second weekly gain. Gold forward offered rates from one to six months, which show the interest rate at which dealers will lend gold for dollars, turned negative in London last week. July gold futures in New York closed at $1,290.80 yesterday, above the August contract’s settlement of $1,290.40. Backwardation, when nearby contracts are more expensive than longer-dated futures, reflects a lack of supply. Lease rates for bullion, which reflect the cost of borrowing metal, rose to a 4 1/2-year high in London last week.
“Most of the rally already happened,” Bhar said by telephone today. “The tightness will probably stay for the foreseeable future. There is some dislocation in the physical market because of the fall in the price, the huge increase in physical demand, particularly out of China, less so in India. This is one of those stress points. It won’t continue forever, because gold, in theory, is not in short supply.”
Bullion’s drop to a 34-month low in June spurred an increase in physical buying as banks including Societe Generale and Credit Suisse Group AG predicted prices would fall further. A scarcity of metal liquidity in leasing can lead to high lease rates and negative forward rates, the London Bullion Market Association says. Gold slid 23 percent this year as some investors lost faith in the metal as a store of value and the U.S. Federal Reserve indicated it may start withdrawing from its record stimulus program.
The one-month forward offered rate was at minus of about 0.12 percent on July 10, equal to the level reached on Nov. 21, 2008, data compiled by Bloomberg show. SocGen said the backwardation was the most since 1999 when European central banks agreed to limit gold sales. The rate went to minus 4.53 percent that year.
The one-month lease rate rose to 0.3038 percent on July 10, the highest since December 2008, and was at 0.2565 today, data compiled by Bloomberg show. The lease rate is derived by subtracting the gold forward offered rate from the London Interbank Offered Rate.
“Strong physical demand has returned to the gold market in the wake of the sharp price fall in June and is reflected in local premia and in borrowing rates,” Bhar wrote.
Gold for immediate delivery rose 0.1 percent to $1,293.04 an ounce by 2:01 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 silver and corn.