Misinterpretation of Gold Lease Rates and Why Gold Could Rise

...the gold carry trade has become more profitable as the financial crisis has unfolded. While the spread between LIBOR and GOFO has increased the cost to lease gold has actually decreased. At the same time LIBOR has increased creating the most profitable gold carry trade this year. In fact, the biggest spread occurred during the most recent equity market decline. This explains why gold has not traded to new highs while the financial markets melted down.

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As banks begin to lend to each other, they will look for sources of funding. The wide spread on the gold carry trade will be very enticing and should result in bullion bank shorts in gold. It is this action that has the potential to cause a short squeeze. Coupled with increasing investment demand, the move up could be significant.