Gold Lease Rate Higher, Registered COMEX Gold Lower

Just another update.

Gold Lease Rates are at an all time high again:

Chart 1: Gold Lease Rate

COMEX registered gold has once declined to even lower levels. J.P. Morgan unloaded its registered gold. Total registered gold at COMEX now stands at: 875713 troy ounces. We are nearing the bottom.

Chart 2: COMEX gold

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The Declining Trade Deficit: Not As Rosy As You Would Think

The trade deficit numbers are out for June 2013 and have been very positive. Due to an oil boom, the trade deficit shrank 22% from around $44 billion in January 2013 to $34 billion in June 2013.

As you can see on Chart 1, the decrease in deficit was due to an increase in exports (red chart) and a decrease in imports (blue chart). This looks very promising, but I want to show that not all is well if you look into the details.

Chart 1: Import Vs. Export

Let's look deeper into these import and export numbers. Chart 2 gives the breakdown of the export numbers. The largest segments are "machinery and transport equipment", "chemicals and related products" "mineral fuels and lubricants" and "re-exports".

Chart 2: Exports January 2013

Chart 3 gives the breakdown of the import numbers. The largest segments are 'machinery and transport equipment", "mineral fuels and lubricants", "miscellaneous manufactured articles".

Chart 3: Imports January 2013

From these numbers we can deduct that the oil industry is indeed a very important segment that will influence the import and export numbers.

If we then further look at how these numbers evolve in time from January 2013 till June 2013 we have charts 4 and 5.

Chart 4: Exports (billion USD)

Chart 5: Imports (billion USD)

When analyzing the trends on charts 4 and 5, there is one segment that is worth noting. We see that exports of petroleum products (which are incorporated in the segment "mineral fuels and lubricants") have been going up, while imports of the same have been going down. The reason for this can be found in the divergence of West Texas Intermediate (WTI) crude oil and Brent crude oil.

To continue reading this analysis: go here.

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Tax Receipts Vs. Savings Rate

Whenever the government raises taxes or when corporate profits rise, tax revenue will rise with it (blue chart).

But this has implications, if tax revenues rise, this will deplete the personal savings of the people. The red chart shows the personal savings rate (%). There is a negative correlation to be found here.

It shows us that higher tax revenues always lead to lower personal savings rates and vice versa. From this correlation we can deduct one thing. There is a limit to raising tax revenues. If the personal savings rate gets to 0%, there is no more margin to increase taxes.

At this moment the personal savings rate is 4.4% and is almost at a historic low. Contrast this to the savings rate of China, which is 50%. Also note that tax revenues have been declining as a percentage of GDP. This means that corporate earnings growth isn't keeping up with GDP growth at a constant rate of taxation.

To read more about this correlation go to this article.

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Single Family Housing Starts Vs. Unemployment Rate

One of the key metrics for the health in the housing market are the "privately owned housing starts". "Housing starts" are an economic indicator that reflect the number of privately owned new houses (technically housing units) on which construction has been started in a given period. Usually, a decline in the "housing starts" leads to the start of a recession. 

The "housing starts" are a leading indicator for the unemployment rate. Both metrics are inversely correlated. When the "housing starts" drop, the unemployment rate will rise with a lag of about 1 to 2 years.

Because of the fact that the "housing starts" are a leading indicator, this is a very important metric to predict the unemployment rate. As a consequence, the "housing starts" are also a predictor of real GDP, capacity utilization, the stock market index and the consumer price index (CPI).

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Red Alert: Gold Forward Rates Turn Negative

As I told before, the only parameter that is going to dictate gold lease rates, is the GOFO rate, because the Federal Reserve will always keep the fed funds rate at zero, which means the LIBOR rate will stay at zero. 

The GOFO rate though, is dependant on the demand and supply mechanics of gold. And today we have the first time that the GOFO rate actually turned negative, which is officially a backwardation in gold. Since the 2008 crisis hit us, the GOFO rate has never been negative, so this is a premiere. As a matter of fact, we have never seen a negative GOFO rate in a decade or more. (except for those few days in 2008 which are ignorable)

Once such events happen, we will see a huge shortage coming in gold.

Chart 1: LBMA GOFO rate turns negative

And the subsequent rise in lease rates:

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Correlation: Mortgage Rates Vs. Mortgage Applications Vs. Pending Home Sales

Just discovered another correlation on Zero Hedge. If mortgage rates go up, lending becomes more difficult, so people stop applying for new mortgages. This means there is a negative correlation between mortgage rates and mortgage applications.

When mortgage applications go down, not a lot of homes will be sold. This means that home sales will go down. As suggested by the following chart, there is a correlation here between mortgage applications and pending home sales.

If it's true that interest rates and mortgage rates will go up, you can bet that we will have another housing crisis. Home sales go down. All those homes will be coming onto the market, while nobody wants them.

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Unemployment Vs. Real GDP

The inverted Unemployment Rate is correlated to Real GDP and is also known as Okun's Law named after Arthur Melvin Okun.

Zero Hedge featured Okun's Law in this article.

Red curve: inverted yoy% change in unemployment rate

Blue curve: yoy% change in real GDP

Never in history has the unemployment rate been so artificially low (red graph artificially high) as today. The red curve has never been higher than the blue curve, which implies that the unemployment rate is much higher than officially reported.

We already know what the cause is: a lot of discouraged and part-time workers.

Moreover, the chart suggests that Real GDP (blue chart) is a leading indicator for the unemployment rate (inverted red chart).

As a final note, notice that we are talking about real GDP, which is inflation adjusted. This means that inflation negatively impacts real GDP and therefore inflation will in turn create higher unemployment rates at a constant GDP rate.

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Correlation: LIBOR Vs. Fed Funds Rate

The LIBOR rate at which the banks lend each other money, is an important element in calculating the gold lease rate. Obviously, this LIBOR rate is influenced by the Federal Reserve via the Fed Funds Rate.

As you can see on this chart, there is an almost 100% correlation between LIBOR and the Fed Funds Rate.

As the Federal Reserve said that they will keep interest rates at zero until 2015, LIBOR rates will keep floating around the 0% level.

This also means that the gold lease rate (LIBOR minus GOFO (Gold Forward Rate)) is entirely dependent on the GOFO rate as long as the Federal Reserve keeps interest rates near zero.

Once inflation begins to pick up though, the Federal Reserve will have to raise the Fed Funds Rate (contractionary monetary policy), which will increase LIBOR rates and this will tend to raise the gold lease rates. In turn, high gold lease rates are a bullish environment for gold prices.

Note that there is one power that will force the Federal Reserve to increase its Fed Funds Rate and that is the yields on the bond market and the mortgage market.

As you can see on this graph below, the adjustable mortgage rates are starting to edge upwards even with a zero interest rate policy. Government bond yields are also edging upwards. So eventually, the Federal Reserve will be pressured to increase interest rates to keep up with the rise in bond and mortgage yields.

Investors who are still invested in the U.S. bond market, are taking a huge risk at this stage, especially when Ben Bernanke is forced to implement contractionary monetary policies at some point. Who will buy these U.S. government bonds... As a matter of fact, foreign investors are already dumping U.S. bonds as shown in the foreign U.S. bond investors report of April 2013.

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Gold Lease Rate

This page is created to monitor the "Gold Lease Rate".

The gold interest rate earned on fiat gold is commonly referred as the gold “lease” rate.

It is calculated as:

Gold Lease Rate = Libor Rate - Gold Forward Rate.

The LBMA presents the data every day at this link.

Whenever the gold lease rate tops out (spikes upwards), the gold price will hit a bottom as central banks demand the gold back from the bullion banks at higher gold lease rates. So it is a bullish sign to have high gold lease rates. It means that the GOFO rate is very low, which indicates backwardation in gold.

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Red Alert in Gold Lease Rates

I have become very bullish lately on silver and was already bullish on gold.

But the following chart makes me ultimately bullish. We see the biggest increase in gold lease rates as of yesterday and we have seen this before. In 2008, the gold lease rates started to spike upwards, which meant gold was in short supply. It also meant that the "interest" to hold gold was going up, just like the "interest" on your cash is going up.

This ultimately means that the world is valuing gold at a higher interest rate and the central banks are demanding their gold back from the bullion banks.

We are in for a huge upside move if you ask me.

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Adjustable Rate Mortgage Vs. Federal Funds Rate

This page is created to monitor the 1 Year Adjustable Rate Mortgage Average Vs. Effective Federal Funds Rate.

The Fed Funds Rate (red chart) sets the short term rates, in particular the 1 Year Adjustable Mortgage Rates.

Whenever the Federal Reserve increases/decreases the lending rate between banks, the short term rates will follow suit.

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30 Year Fixed Mortgage Rate Vs. 30 Year U.S. Treasury Yield

This page is created to monitor the 30 year Conventional Fixed Mortgage Rate Vs. 30 year U.S. Treasury Yield.

There is an obvious historical correlation here. The thing to watch here is that the mortgage rate (blue chart) should always be higher than the treasury yield (green chart).

When this is not the case, U.S. treasury yields should decline / mortgage yields should increase.

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Wage Inflation Vs. Unemployment Rate

This page is created to monitor the Average Hourly Earnings of Production Vs. Unemployment Rate.

When unemployment declines (yellow chart), wages inflate (blue chart).

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Capacity Utilization Rate Vs. Consumer Price Index

This page is created to monitor the Capacity Utilization Rate Vs. Consumer Price Index (CPI).

When capacity utilization goes above 80%, the industry goes above a threshold where it lacks capacity to produce. At that moment the only way to rebalance is to increase prices.

When the capacity utilization goes above 80% (blue chart), the CPI (red chart) will follow suit after 1 year as capacity utilization is a leading indicator for inflation.

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Correlation: Fed Funds Rate Vs. 10 Year Bond Yields

Another correlation Azizonomics taught me is the Fed Funds Rate Vs. 10 Year Bond Yield (Chart 1).

As long as the federal reserve keeps interest rates at zero, there is no way the 10 year bond yield will go up.

Chart 1: Fed Funds Rate Vs. 10 Year Bond Yields

If you think about this, we have 2 forces. One is debt growth (Chart 2), which is skyrocketing and the other one is the fed funds rate (Chart 1) which is at historic lows. Debt growth induces higher bond yields and low interest rates are inducing lower bond yields. I wonder which force will eventually win.

Chart 2: Public Debt Growth Vs. 10 Year Bond Yields

If the Federal Reserve even thinks about setting higher interest rates, the bond market will immediately collapse!

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Bitcoin Hits All Time High

Just to remind you that the bitcoin price has hit new all time highs at $35.

Chart 1: Bitcoin Price

With the high correlation between bitcoin and gold, there is no way that gold won't go higher.

Chart 2: Gold Price

As a matter of fact, Shanghai silver premiums hit a high of 4.36% today.

Chart 3: Shanghai Silver Premium

And even better, lease rates are hitting new highs.

Chart 4: Gold Lease Rate

While stress is still building up with record low GOFO rates.

Chart 5: Gold Forward Rate

People say I try to time the market, I say knowledge is power.

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Tightness Continues in the Precious Metals Market

There are several indicators of a tight gold market right now and I want to show you this in the following analysis. I will talk about the GOFO rate, premiums, supply and demand, CFTC report.

Investors shouldn't worry about the gold price declining, this is a healthy consolidation phase we are entering in now. Of course, we hear about George Soros lightening up his gold positions, Jim Rogers starting to hedge the gold price and Dennis Gartman shorting gold, but I see that more as a contrarian indicator. In the long term, fundamentals will win the battle.

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Savings Rate Points to a Deja Vu Recession

Remember where I said this:

"Unlike in 2008, the savings rate isn't going up though (Chart 5). If this trend actually reverses upwards, the real collapse will start because when people save money, debt will be paid off and the currency supply will drop."

It has finally happened, the savings rate is going up to 6% (Chart 1). Credit is being repaid, the currency supply is going to shrink and the economy is on the verge of collapse, again.

The GDP has gone negative, if we get another negative growth in GDP, then we have a recession.

Chart 1: Personal Savings Rate

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Why are the silver lease rates flat at Kitco?

At last we know the reason why the lease rates for silver were flat for so long (and still are). James Turk told us just recently that the LBMA (London Bullion Market Association) is no longer reporting silver interest rates and silver forward rates.

As you know, the lease rate is LIBOR minus GOFO and the same applies for silver. If they don't report the silver forward rates, you can't get the lease rate anymore, because we lost a parameter of the equation. James Turk says that the LBMA is underreporting on the silver forward rate. It's reporting contango, but actually it should be in backwardation. When gold and silver are in backwardation, that means we will have high probability of getting inflation.

That's what I'm making of this, unless there is someone who can give another explanation for the flat curve here:

Chart 1: Silver Lease Rate

Luckily, we still have the gold GOFO and gold lease rates. The GOFO is still in contango (3 month GOFO = 0.42%). So we just use those to "assume" silver forward rate ... If we do get a spike down in GOFO, then severe backwardation could show up.

One thing is certain. If gold lease rates go up, the GOFO goes down and that means the gold goes in backwardation. And that also means that silver is going in backwardation. That ultimately means that you should buy silver when silver lease rates go up.

If this event of the LBMA isn't a reason to buy silver, I don't know what is.

And finally, isn't it a coincidence that the silver priced started to move up just when the curve went flat (Chart 1)?

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Euro Vs. USD: Take Two

5 months after I wrote the article about the Euro Vs. the USD, it looks like the USD has won the match against the euro. Since April 2012, the euro has lost 5% against the USD. Let's look at what has changed in those months.

Following list gives the most important indicators for the future of a currency:

• Current account balance of the country
• Total national debt of the country
• Inflation rate
• Interest rate

If the current account balance of the country is positive, a country will export more than it imports. As the population of the country exports more, they will receive more foreign money. This money will then be converted into their own currency, which is then spent or put in their banks. As the foreign money is converted into the money of the country's population their own currency will appreciate in value.

The larger the national debt of the country, the more expensive it will be to sell debt to foreigners. The government will then be obliged to monetize this debt to keep interest rates low and to be able to service this debt. Rising debt load will therefore devalue the currency.

The higher the inflation rate, the lower the currency will go. An example is Vietnam, where the dong lost much of its value due to high inflation.

When interest rates are lower than the inflation rate, there is no incentive for foreigners to buy the currency. There is no incentive to save money. The consequence is a lower currency value.

Let's look at the current statistics:

1) Current account
5 months ago, the current account deficit of the US was in the order of $US 110 billion per quarter, which amounted to $US 450 billion per year (2011).

For the Eurozone, the 12-month cumulated seasonally adjusted current account recorded a deficit of EUR 44.9 billion.

Today, the eurozone is posting a current account surplus of 14.9 billion euro in June, while the U.S. is increasing its quarterly deficits to $US 137 billion in the latest quarter.

So in this case, the eurozone is still the winner.

Europe VS USA: 1-0.

Euro Area Current Account (Million euro)

U.S. Current Account (Billion USD)

2) Total National Debt
Total US national debt is $US 16 trillion. Total eurozone national debt to GDP is 88.6%, the GDP is $US 17.578 trillion in 2011, which translates to $US 15.6 trillion in Eurozone debt. So again, Europe wins by a small margin.

Europe VS USA: 2-0

3) Inflation Rate
5 months ago, the inflation rate in the Eurozone was 2.6%, while the inflation rate in the U.S. was 2.9%. Today the inflation rate in the Eurozone is 2.4%, while the inflation rate in the U.S. is 1.4%. This is a significant and surprising decline in inflation rate in the U.S Vs. Europe.

Europe VS USA: 2-1.

Euro Area Inflation Rate

U.S. Inflation Rate

4) Interest Rate
5 months ago, the interest rate in the Eurozone was 1%, while the interest rate in the US was essentially zero. As we already know, Mario Draghi lowered interest rates to 0.75%, but this is still higher than the interest rate in the U.S. (0.25%). Europe VS USA: 3-1

Euro Area Interest Rate

U.S. Interest Rate

     

Conclusion: Europe still wins by 3-1 against the USA, but is losing ground through inflation. Though I think the current account surplus of Europe is the most important positive indicator of the strength of the euro in the future.

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