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Bank runs are terrifying events that have been part of every fractional reserve system in history.  One moment your capital is simply on-demand, one simple withdrawal request away, and the next moment you’re facing either a hair-cut or the full force of a complete default.  Negative GOFO prints are accelerating (1 month GOFO fell to -0.6% yesterday), and I think these are the best evidence that a “golden bank run” is underway.

From here, like every bank run, it’s all about confidence.  1.  Confidence from the gold depositor (think European wealthy family offices, Arabic oil states, Russian Oligarchs, etc) that the bullion bank custodian can return the gold on demand. 2. Confidence from the bullion bank that the gold they on-lent to the mining companies or short side speculators, will be mined and returned. 3. And Confidence from the generalists that if they ever decide to buy gold that it will be available on-demand.

I’ve been studying lease rates and GOFO for years, and I think real panic is brewing within certain gold depositors.  Whether it’s been all the talk about gold repatriation, high and rising physical premiums in China and India, falling registered COMEX gold levels, technical default by several European banks who elected to close gold accounts and pay-out in cash only, retail rationing at global mints or more likely first hand experience of a bullion bank pushing back on requests to return their gold deposit.

This is one reason why I can’t understand why wealthy investors would turn themselves into bank depositors – why would they trust bullion banks to store and manage their gold for them when the whole case for gold holdings is to completely eradicate any form of third party credit risk.  It’s always the depositors that fare worst and have the most to lose.

From the bullion banks perspective (remember they are the ones setting the GOFO rate) negative GOFO means instead of accepting gold deposits, posting $ in return and charging the depositor the GOFO “yield” they are now so desperate for gold deposits that they are advertising to accept gold, post $ in return PLUS pay for the privilege (0.6% annualised for rolling 1 month agreements).

Think about it again.  The bullion bank is accepting an asset that has no intrinsic return, has expenses to insure and store, and in return is posting $ that it could otherwise invest in the markets, $ that it otherwise has to raise via it’s individual cost of capital.  For this exchange, they themselves are coming up with a negative charge!

Now the question to ask is why?  Like any fractional bank, the bullion bank is mismatched between deposits and loans.  What is happening is that they are being hit from both sides.  Depositors are lining up demanding return of their bullion and at the same time their borrowers (mining companies) are struggling with their own default probabilities (see CDS on gold miners – its on the rise as gold prices near the cost of production).

Also bullion banks do not simply keep the gold on account.  They mobilise it in their own investment books, they rehypothecate it, they register it on exchanges for futures contracts delivery, in summary they can’t always get it back.

Being hit from both sides like this makes a default progressively likely.  The most aggressive gold depositors will be best placed, as in any bank run.  First in, best dressed.  As the panic spreads gold’s physical premium (convenience yield) will shoot higher, and overnight gold will go bid only.  I would recommend you get your physical requirements in order well before that moment.

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