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Rising Lease Rates Show Demand For Physical Gold Remains Strong
By Neils Christensen of Kitco NewsThursday July 11, 2013 1:11 PM
(Kitco News) - Although investor demand for gold remains weak, retail investors and industries continue to pay a premium to buy the physical metal now.
On Tuesday, one-month lease rates for gold hit a four-year high and rose to 0.3%.
According to some analysts, the lease rate is important because it in an indication of industry demand. Jewelry stores will lease gold, which is backed by the future sales of their products. Mining companies will also borrow gold at the lease rate and then pay back the loan with future production.
Peter Hug, global trading director at Kitco Metals, said the rise in lease rates is an indication that the jewelry industry is gearing up in anticipation for the Christmas holidays.
According to some analysts, the rise in the lease rate is an indication that demand remains strong for physical gold despite a massive influx of the precious metal.
Martin Arnold, director of research at ETF Securities, said that demand in Asian, particularly India and China, has been the key driver in taking the supply out of the marketplace. He said in their research, they have been monitoring three factors: the Shanghai Metals Exchange, gold imports into Hong Kong and sales at major jewelry stories in China.
“There is still a lot of physical demand in China,” he said.
Martin added that because high prices in the last few years created a void in the marketplace and now prices are lower, people are starting to fill that void.
Although most of the demand is from Asian, Martin said there is the potential for increased buying of physical gold in Europe as countries continue to deal economic uncertainty. He added people are scared that they are going to lose their jobs and their wealth.
“Buying gold bars is an easy way for people in the street to know they have got some wealth,” he said.
Keith Weiner, president of the Gold Standard Institute USA and CEO of Monetary Metals, has been watching the physical market closely and said factors like backwardation, the rise in lease rates and low inventories in Comex vaults is an indication that buyers are becoming more aggressive in the marketplace.
“The scarcity has risen to the point where I would be hesitant to bet against gold,” he said.
Weiner said although prices dropped from lack of investor interest, he wouldn’t expect prices to fall much lower as demand for physical bullion will continue to support the market.
“Gold is transferring out of the investment vehicles and into the hands of people who will hold it permanently as a source of wealth,” he said.
Bill Baruch, market strategist at iiTrader.com, said that although prices could fall lower in the near term, it appears that $1,200 is a value level for investors.
“It’s seen as a value area to hedge against risk and economic uncertainty,” he said.
By Neils Christensen of Kitco News nchristensen@kitco.com
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