The Sane Investor

Misinterpretation of Gold Lease Rates and Why Gold Could Rise

Great article, I found it very interesting.

Although you mentioned it could create a short squeeze, that would only be if people were all nakedly shorting gold (or if their position ended in a net short on gold). However, I´m guessing that most people engaged in this carry trade are completely hedging out any risk of gold going up by buying gold futures. SInce they´re only using it to get cheap financing and take advantage of the spread between GOFO and Libor, it doesn´t make sense to open your self up for higher risk, especially since gold is seen as a reserve of value and prime for recessionary times.

I haven´t seen a huge difference in spot prices and futures prices, and I would imagine that we would see that if this was an extremely common trade. That trend would reverse at the end of the month, however.

I´m of the opinion that gold isn´t going to see its rise until people start attacking the U.S. dollar, which doesn´t look very likely to happen any time soon. However, that trend could change in a week with how volatile things have been and how merciless investors have been when they find a new ¨it¨ asset.