Gold lending rates roar back after jobs data

By Reuters

Dec 06, 2014 09:24 PM EST

The cost of lending gold returned to positive territory on Friday for the first time in over a month, capping a dramatic week-long recovery, as robust U.S. jobless data reinforced expectations of higher interest rates next year.

In the latest sign that the world's largest economy remains on the path to recovery, data showed U.S. employers added the largest number of workers in nearly three years in November and wage gains picked up, fueling expectations the Federal Reserve is closer to raising interest rates.

The news sent spot gold prices down more than 1 percent as investors bet the U.S. central bank would increase rates sooner than expected, and sparked a rally in the U.S. dollar, which hit its highest level against the yen since 2007.

It lifted the gold forward rates (GOFO), with one-month rates rising to 0.12 percent, to their highest since end-September and up from negative 0.01 percent a day earlier.

The rate represents the level at which bullion banks are prepared to lend gold as collateral on a swap against U.S. dollars, and higher rates tend to support gold by raising the cost of borrowing for short sellers.

Overall leasing rates are calculated by subtracting GOFO from the London interbank offered rates (LIBOR).

Rates into next year were even stronger, with six-month levels rising as high as 0.16 percent on Friday, up from 4 percent a day earlier and a dramatic reversal from minus 0.10 percent on Nov. 27.

"(Six-month GOFO) is up on the back of expectations of higher rates. Gold rates tend to track USD rates, which are sharply higher after a strong payrolls report," said Tai Wong, director, metals trading at BMO Capital Markets in New York.

The fluctuations are the latest to roil the bullion market after rates languished in negative territory for most of November, one of the longest periods of a discount on record going back to 1996. Rates were pressured as investors swooped in to borrow metal ahead of a referendum in Switzerland that would have forced the central bank to buy up massive amounts of gold, tightening the availability of London bullion.

The vote was rejected on Sunday.

Last Friday, rates had been as low as minus 0.55 percent. Historically, it has been rare for rates to be at a discount.

"I think someone was very concerned about the possibility of Swiss repatriation and borrowed gold in substantial volume over the course of November," said Wong.

"Once the referendum failed, they let the gold back into the market and it completely unwound the tightness in a week."

The recovery in rates this week has been staggering for its speed and size. Market participants said the flip back to positive territory came as bears covered their short positions.

Rates as low as minus 0.55 percent made it extremely costly to hold onto a short position.

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