by Alexander Abad-Santos  /  Feb 22, 2012

It’s being called the “negative salary”: Due to austerity measures in Greece, it’s being reported that up to 64,000 Greeks will go without pay this month, and some will have to pay for having a job. Numbers in austerity reports have usually reflected figures in the millions, since they reflect industry-wide cuts (i.e.  a 537-million euro cut to health and pension funds). And plans of cutting minimum wage by up to 32% is all but a given in the country. Today’s “negative salary” deal—which could have government employees returning funds— reveals the real human impact of the austerity measures.

As Zero Hedge and the Press Project report:

Salary cutbacks (called “unified payroll”) for contract workers at the public sector set to be finalized today. Cuts to be valid retroactively since november 2011. Expected result: Up to 64.000 people will work without salary this month, or even be asked to return money. Amongst them 21.000 teachers, 13.000 municipal employees and 30.000 civil servants.


While Iceland is now known as the country that is the closest earthly approximation to Banker Hell, it is safe to say that Greece is the terrestrial equivalent of banker heaven. Because as explained earlier today, the country’s population is about to get a worse deal than your average run of the mill slave – they may get whipped, but at least never have to pay for the privilege, unlike the Greeks. Hence Negative Salaries. As also explained, the European bailout of Greece, is now formally a Greek bailout of Europe, funded by the country’s already negative primary surplus, or better said – deficit (don’t try to make mathematical sense of that – a Scene Out Of Scanners is guaranteed). Hence,Negative Bailout. But the piece de resistance, and the reason why Greece is the in situ version of bankster heaven is the news from the NYT That Greece is also about to have negative gold.

Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal.

Well, they may be broke, and they may be bailing out Europe, but at least they’ll have no gold: sounds like a sweet deal – it makes perfect sense that Greeks are taking every incremental humiliation from a syndicate of few fat, bald types who have access to a digital money printer, with the supine determination of an Oliver Twist.

by Tyler Durden  / 02/23/2012

While hardly discussed broadly in the mainstream media, the top news of the past 24 hours without doubt is that in addition to losing its fiscal sovereignty, and numerous other things, the Greek population is About To Lose Its Gold in a perfectly legitimate fashion, following amendments to the country’s constitution by unelected banker technocrats, who will make it legal for Greek creditors – read insolvent European banks – to plunder the Greek gold which at last check amounts to 111.6 tonnes according to the WGC. And so we come full circle to what the ultimate goal of banker intervention in the European periphery is – nothing short of full gold confiscation. So just how much gold will be pillaged by the banker oligarchy (it is amusing how many websites believe said gold is sacrosanct by regional national banks, and thus the EUR is such a stronger currency as it has all this ‘gold backing’ – hint: it doesn’t, as all the gold is about to be transferred to non-extradition countries)? As the World Gold Council shows in its latest update, between all the PIIGS, who will with 100% certainty suffer the same fate as Greece (which has shown that unlike during World War 2, it is perfectly willing to turn over and do nothing) there is 3234 tonnes of gold to be plundered. And likely more as further constitutional amendments will likely make the confiscation of private gold the next big step. how much does this amount to? At today’s prices this is just shy of $185 billion. Of course by the time the market grasps what is going on the spot price of the yellow metal will be far, far higher. Or, potentially far, far lower and totally fixed as the open gold market is eventually done away with entirely in a reversion to FDR gold confiscation and price fixing days.

The chart below shows total gold holdings for the top 40 countries. Little Ireland is off the chart with just 6 tonnes of gold.

3 Month LIBOR – GOFO

Long-Term LIBOR – GOFO


One of the more curious dynamics for those who follow the gold market closely, has been the relentless grind lower (or higher if looked at on an absolute value basis), of gold lease rates (defined as Libor – GOFO), which recently hit all time record lows (i.e., negative), for the 1 month version, although the more traditional 3 Month (as it is based on the benchmark 3M USD Libor) was also quite close to breaching historic low levels. And while we have discussed the nuances of Libor-GOFO, or the gold lease rate extensively before, a good summary was presented by Jesse’s Cafe Americain yesterday, who correctly suggested that record lease rates are a primary driver for the near historic sell off we experienced yesterday. In a nutshell, negative lease rates mean one has to pay for the “privilege” of lending out one’s gold as collateral – a prima facie collateral crunch. The lower the lease rate, the greater the use of gold as a source of liquidity – and since the indicator is public – it is all too easy for entities that do have liquidity to game the spread and force sell offs by those who are telegraphing they are in dire straits and will sell their gold at any price if forced, to prevent a liquidity collapse. Said otherwise: to force a firesale. Well, we are happy to announce that the selloff spring clip potential that is embedded in a near record negative lease rate has now been discharged courtesy of the $100 dump in the past two days, which may have happened for a plethora of reasons and nobody can tell why precisely, but one thing is now sure: the underlying tension in the supply and demand for gold as a source of liquidity has collapsed. That said, the next time we approach the previous thresholds we will advise readers as it will likely indicate another gold-derived liquidity rubberband “breach” is imminent.

The Reasons To Own Both Silver And Gold Continue To Accelerate

A week ago, we touched upon the likelihood that the recent gold sell-off was driven primarily due to a quirk in liquidity provisioning in which gold plays a key role via its “forward lease rates”, or the Libor-GOFO differential. Specifically, in “As Negative Gold Lease Rates Collapse, The Gold Sell Off Is Likely Coming To An End” we said, “In a nutshell, negative lease rates mean one has to pay for the “privilege” of lending out one’s gold as collateral – a prima facie collateral crunch. The lower the lease rate, the greater the use of gold as a source of liquidity – and since the indicator is public – it is all too easy for entities that do have liquidity to game the spread and force sell offs by those who are telegraphing they are in dire straits and will sell their gold at any price if forced, to prevent a liquidity collapse.” Said otherwise, the lower lease rates drop, and they recently hit a record low for the 3M varietal, the likelier it is that gold may see substantial moves lower. Today, Morgan Stanley’s Peter Richardson recaps precisely what was said here, in a note titled “Recent fall in gold prices points to bank funding costs.” Granted, MS only looks at the first part of the equation – the dropping lease rates, and ignores the re-normalization in gold, aka the tightening in lease rates. Well, with the 3M forward lease rate now almost back to unchanged, it appears our speculation that the gold sell off, with spot at $1575 on the 15th, is over were correct, and gold is now $40 higher, and just below the critical 200 DMA that everyone saw as the catalyst of gold going to $0. So what does MS have to add to our analysis? Well, much more optimism for one, because not only does the bank think we are right that the collapse in negative lease rates (i,e., the flattening to practically unchanged) mean the sell off is over, but such a normalization of the gold lease market has “the makings of a renewed upward assault on the recent all-time high…. Our current gold price forecast for 2012 of US$2,200/oz remains in place under these circumstances.” Qed.

The key highlight of Morgan Stanley’s hypothesis of what negative gold lease rates imply for gold:

Firstly, we think negative lease rates are highlighting a sharp increase in the demand for gold as collateral for US dollar loans at a time of reduced liquidity in the traditional US dollar interbank funding market. The more negative the lease rates the higher the cost of funding using gold as security.

Secondly, access to this collateral on a scale indicated by the rise in GOFO can only emerge if the providers of liquidity to the leasing market are prepared to increase the stock of lent gold in circulation. This development points to the central banks, the largest custodians of above-ground stocks and the traditional providers of liquidity to the gold-leasing market. Aware of acute funding pressures in the traditional interbank market, it seems increasingly likely to us that central banks have increased the quantum of gold available for use in a non-traditional funding market, at least until the measures to alleviate bank-funding stress in the US dollar swaps market have been successful. The recent easing in the scale of negative gold lease rates, suggests that demand for this source of short-term funding might be easing, but has not disappeared, even after the raft of measures announced by the ECB and the earlier coordinated intervention by the six central banks.

Said otherwise: we likely have smooth sailing for now, as banks will not proceed to cannibalize each other for a bit. But keep a very close eye on on that LIBOR-GOFO spread: the second it collapses, it may be time to step away from the market…


Much has been made recently about the “negative gold lease rates” derived from the London Bullion Market Association (LBMA) statistical gold and silver data, but reporting on the issue so far has generally lacked the background, substance and/or context required for many readers to even understand what information is being provided much less draw proper conclusions.

Here are some of the key points raised in our extensive analysis of the subject at Metal Augmentor:

(1) The combination of a falling gold price and rising forward rate is quite a bullish feature of the gold market that is lost in the reporting on negative gold lease rates. An increase in the gold forward rate indicates that owners selling gold will want it back once their immediate funding needs have abated. Therefore it is really the reluctance to sell gold outright that the market appears to be telegraphing via negative gold lease rates. This is a welcome change from a gold market recently dominated by weak-handed participants (Wall Street types like Paulson, Cramer, etc.) who primarily look to gold for its ability to generate speculative profits during periods of economic instability.

(2) The gold (or silver) lease rate does not necessarily represent the actual rate at which lease transactions are being done in the market. The published lease rate is simply an indicated value derived from two related variables, the gold forward rate and LIBOR. These rates can and do move in opposite directions for reasons unrelated to gold leasing activity.

(3) We believe the focus on negative lease rates misses the point of the current gold market structure and instead we should be looking at changes in the gold forward rate. The gold forward rate has increased during both the late September and current sell-offs in gold, which probably means that gold is being leased by central banks in order to provide liquidity for the banking system. Importantly, central bank gold is probably not being sold outright despite rumors to the contrary. The implication is that the current gold correction is similar to past events where gold has been used as a liquidity management tool. Its use for such purposes is hardly inappropriate — after all, gold is the ultimate money and what good is money if it doesn’t get used? In any case, the eventual reversal of gold funding activity should correspond with improved commercial bank liquidity and a return to gold’s dominant price uptrend.

(4) Important structural changes in the financial sector could soon mean that gold’s widespread use as collateral and eventually as money might actually not be that far off. If so, it would only be a natural progression for an asset with no counterparty risk in a post-credit-bubble world. Excessive leverage has transformed even the gold swap and leasing business, which by definition is supposed to involve physical metal, into a paper form a number of years ago. While the recent reports from Bloomberg, Financial Times and elsewhere offer shreds of truth about this condition amid all their misdirection, they fail to examine underlying developments in the gold market that may change the sorry state of affairs. Among the most intriguing is the possible development of clearing and collateral facilities for 100% physical backed gold, perhaps in the format of the LBMA unallocated bullion account.

We suspect that all this talk about “negative gold lease rates” may represent the initial glimmer of recognition that a major development is afoot in the gold market. Pieces of the puzzle are being put together without most people really knowing or understanding what the completed picture looks like. The general trend of the financial markets thanks to the information age has been to move away from intermediation and toward self-directed transaction. The tri-party arrangement redefines the role of the intermediary so that it is no longer the matchmaker between customers but rather acts as a clearing agent, administrator of collateral and a funding backstop. Importantly, in a tri-party arrangement one party posts the collateral that the other party desires. And that desire for specific collateral is where things could get interesting for the gold market with gold being the ultimate collateral. In essence the selective collateral nature of the tri-party format may force bullion banks to eventually declare their unallocated LBMA gold accounts as backed by 100% physical bullion. While there certainly will be gold appearing on the market from time to time in the form of gold leasing or similar funding arrangements, the 300 year history of archaic bullion banking may be coming to an end. If so, it could ironically be JP Morgan that modernizes the gold standard by establishing gold as the premier monetary asset with no counterparty risk and infinite mobility.

The gold time bomb takes the form of a possible panic out of paper gold into physical metal when counterparty risk reaches an extreme level whereas a new gold standard would complement modern financial markets by serving as the ultimate asset: gold with mobility and no counterparty risk. We believe such a radical development could take shape if the most popular paper gold product available today, the LBMA unallocated bullion account, is used increasingly as a source of secured funding between counterparties rather than as credit between a bullion bank and its customers. Indeed, if the gold market is left to its own devices, the shunning of credit risk will eventually lead counterparties to demand that gold be provided in the form of risk-free collateral. The LBMA and bullion banks would then have no choice but to establish and market 100% physical backed unallocated gold accounts similar to BullionVault and GoldMoney, except on a grand scale.

Why gold forward rate inversion is important
by Izabella Kaminska / Sep 14 14:20

Here’s a crazy situation to consider. The gold lease rate (which can also be understood as gold Libor, the gold interest rate or the cost of shorting gold) is becoming increasingly negative at the short end. This is the natural consequence of Gofo rates rising ever more greatly beyond Libor costs at the front end. Since the gold lease is derived from the calculation of Libor minus Gofo, any instance where Gofo is greater than Libor leads to a negative gold lease rate. This, for example, is the historic path of the three-month gold lease rate:

And here’s a closer look at the near-term action:

See, there’s been a collapse. Yet the irony is that there is still a cost to borrow the GLD exchange traded fund.Why should it cost you to borrow GLD at all, but earn you a return to borrow gold (Ed- surely administrative costs)? Weren’t the two supposed to be a like-for-like? What’s more there have been very interesting bursts of short-interest in GLD recently, according to Data Explorers.

But first back to gold lease rates. Gold lease rates first went negative (in this recent spell) in March 2009, and have remained almost consistently negative since about July of that year (with brief interim spells of positivity). But it’s only in the last week that the rate has become severely and almost illogically depressed. Interestingly — despite talk of funding pressure all round — this doesn’t tie with the scenario experienced during Lehman at all. At that time gold lease rates spiked, reaching historic highs. In fact, it was only with the onset of extraordinary liquidity in November that lease rates began to fall quickly. Before that happened, something extraordinary transpired. Gold forward rates flipped, ever so briefly, into backwardation. A situation which has hitherto only really been seen in the Japanese gold market (where gold is denominated in yen). Of course if you consider gold the soundest money carrying the lowest interest rate structure — the ultimate risk-free rate — it makes sense that gold lease rates should closely echo market interest rates, but always remain fractionally lower. So when Libor shot up during the crisis, gold lease rates understandably followed behind them — leading to a situation where if you had gold, you could lend it out for a very high return, since the risk lay with holding cash on reserve rather than gold and you had to be compensated. Gold was the ultimate collateral. Or in other words, the demand for gold rose alongside the expense of borrowing in the interbank market. Eventually the demand for gold became so great that the lease rate overshot Libor, leading to the backwardation discussed above. At that point gold became a bit of aGiffen good. It was — if you believe the goldbugs — a situation which possibly signified the death of paper-money. But even then, while gold itself became backwardated, the Gofo curve remained normal, as did the Libor curve.

What we have now, however, is quite the opposite. Gofo remains in contango — i.e. continues to avoid backwardation — while gold lease rates have fallen sharply into negative territory instead. Almost as a counterbalance. On the surface, the negative rate implies extremely low demand for gold compared to cash. Or you could say, there are currently more people prepared to lend gold at a terrible rate (because there’s so much of it around) than prepared to lend their cash for gold. (Contrary to anecdotal reports from the physical market which suggest a lack of gold sovereigns and such the like.) In this scenario, nevertheless, gold is seen as the risk. Gold has become a lousy monetary substitute, and is anything but optimum collateral. In fact, it is US Treasuries that are being over-bid, not gold. The lower the rate goes, the more it suggests an extreme rush to pawn gold in exchange for cash in the marketplace. Anything but gold, you might say. Meanwhile, the more gold that ends up at the pawn shop, the less favourable the rate received for pawning in the market. (The pawn shop doesn’t want to carry all that risk and has to cover that risk by offering less cash for gold.) Thus it’s not money that is dying, quite the opposite, it’s gold. But there is one important other factor to consider: Central bank intervention. Why on earth would anyone be prepared to lend gold at a negative rate for almost two years, when demand in the physical market was supposedly so huge? If you consider that these actions were what prevented gold from flipping into backwardation, perhaps it becomes a little clearer. As Reginald Howe at the Golden Sextant points out: 

At the LBMA, therefore, gold continues to avoid backwardation, but only because central banks continue to lend at historically very low lease rates. It is a strange situation. Gold for spot delivery and bullion funds with high credibility for physical possession of metal in the amounts claimed are selling at premiums over paper of lesser reliability. But where gold is arbitraged against currencies on the basis of relative interest rates, it remains in contango.

Now, if this is the result of some sort of central bank intervention, it’s clear that the central banks still have to find end demand for that lent gold (via the bullion bank intermediaries). The gold mining companies that used to be  counterparties, have closed their hedging books. They’re no longer willing takers of borrowed gold.

Who’s the only viable candidate left? Answer: Gold ETFs and gold exchanges. While the likes of GLD insist every share outstanding is matched by a gold bar — and this is almost definitely true — what they can’t claim is that there’s a way to differentiate gold with previous claims on it from gold without previous claims on it within its reserves (i.e. borrowed gold). It is consequently entirely possible that gold ETFs are sitting on mountains of borrowed central bank gold. GLD’s defence, of course, is that prior claims on its reserves are not their concern. They are the liablity of the party that delivered the gold to GLD (almost certainly a bullion bank). Thus it is the bullion bank that risks being squeezed on delivery in the physical market, not GLD. Of course, with a negative interest rate for borrowing gold, the bullion banks are being more than compensated for the risk of a squeeze. On top of everything they can always create new GLD shares ad infinitum, if needs be. (At least until all central bank gold stock has been lent into gold ETFs, arguably forcing central banks to replenish the gold lending pool via market purchases.)

In the above scenario — in which bullion banks are possibly recycling borrowed gold into GLD shares to sell into the market — these short sales will put pressure on GLD units themselves. As Howe noted earlier this year:

In recent months, while GLD has generally sold at a slight discount to net asset value, other bullion funds with more transparent and credible custodial and auditing procedures have commanded significant premiums. E.g., Central Fund of Canada (CEF), Central Gold Trust (GTU), Sprott Physical Gold Trust (PHYS). Anecdotal evidence also continues to surface of premiums for spot delivery of physical metal or cash settlement in lieu of physical.

Thus, if central banks are really using bullion banks as feeders of borrowed gold into gold ETFs (so as to suppress prices and keep gold lease rates negative, avoiding gold backwardation), you’d assume the strategy could easily unravel if and when people started liquidating large portions of GLD, i.e. forcing delivery of that gold.

Gold and the create-to-lend mechanism
Ordinarily when new shares are created in an ETF for shorting purposes, there is no respective spike in assets under management. That’s because shares are often created using the “create-to-lend” facility, which sees shares issued against borrowed stocks which are almost immediately sold into the market. Since there is no incremental demand for those shares, an oversupply of units hits the market place causing the ETF arbitrage mechanism to kick in. The very same shares are thus almost immediately redeemed, leaving assets under management unchanged but the short-interest ratio higher. This, by the way, is how we get to such large short-interest ratios in some popularly shorted ETFs. Of course in the bullion scenario, one could argue that the shorts are continuously lapped up by strong demand from GLD buyers. The shorts are thus disguised by continuing assets under management growth — a fact which leaves the short-interest ratio relatively stable, and has a slowing impact on AuM growth if anything. But if a large GLD share owner coincidentally liquidates a sizeable portion of GLD shares one day (in order to take delivery of real gold instead), this could theoretically destabilise the short-interest balance. A fact which may or may not have happened recently. As the short-interest data firm Data explorers noted at the end of August:

The amount of money invested in SSGA’s Gold Trust (GLD) is very close to the total assets in the instrument, which tracks the S&P 500 (SPY) at USD 71bn. GLD issues shares in exchange for deposits of gold. On August 10th, there was an unusually large rise in short selling by 250% to 18m shares. This position was then immediately covered as gold began its recent ascent to $1,917.9 on Monday of this week.

There has been little activity in this ETF’s other listings in Hong Kong, Singapore and Tokyo. Another large and physically backed (i.e. owns gold) ETF is the iShares Comex Gold Trust (IAU). This has sporadic spikes in short interest, and these spikes have increased in their frequency over this past quarter, showing some evidence that the need to hedge or short gold is more frequent than it was. If we look at the number of securities lending transactions, we see a 20% increase in the number of loans in GLD in the last week alone. The absolute rise in shares short might not be that cataclysmic, but more trades might well mean more positioning, which translates to nervousness that the gold price cannot sustain such lofty levels. The equivalent rise in trades in IAU is 84% since last Thursday – a huge change.

The fact that the short position was immediately covered suggests that whoever liquidated GLD sold the bullion back into the market. By doing so it allowed the short parties to cover their position, bringing the overall short-interest ratio back to equilibrium quickly. Whatever the case, one thing’s for sure. Volatility in the gold/GLD spread (blue line below) has increased since August 10, which was about the time of the Paulson GLD liquidation rumours:

So has the GLD liquidation possibly disturbed the short-ratio balance? Is this why gold lease rates have had to adjust radically downwards? Are bullion banks demanding increased compensated for supplying borrowed gold into gold ETFs because there’s suddenly been a genuinely large amount of gold thrown back into the gold system? Is this also why AuM has stagnated and GLD has become ineffective as a central bank policy tool? Who can say, but all these factors are definitely worth thinking about we would argue.


What do silver lease rates have to do with fund redemptions? 
– FT Alphaville
Gold Derivatives: GLD and Ass Backwardation
 – FT Alphaville
Cash for gold, financial market edition 
– FT Alphaville
The secured lending boom (through gold-tinted glasses) 
– FT Alphaville

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