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Wednesday, December 19th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Should You Still Ask TED About Gold?

By Brad Zigler

Used to be that whenever you wanted to know what the market really thought about gold, all you had to do was consult TED. TED is an archaic acronym for the “Treasury bill-eurodollar” spread—the price/yield differential between then-extant Treasury bill and eurodollar futures.

(Eurodollars are greenbacks on deposit in foreign—mostly London—banks; futures on bills and eurodollars used to trade on the Chicago Mercantile Exchange, but have been long-delisted).

Though bill and eurodollar futures are gone, the TED spread is still followed. It’s now commonly tracked as the yield differential between cash market bills/notes and Libor—the London interbank offered rate—for dollar deposits.

There’s a strong relationship between TED spread and gold lease rates and, consequently, the shape of the gold futures curve.

Lease rates reflect the interest paid to borrow (“lease”) physical gold for a specific period of time. Put another way, it’s the opportunity cost for holding gold and not lending it out.

Typically, gold lease rates move inversely with the level of COMEX gold inventories—specifically, registered stocks. Registered inventories are those that are immediately deliverable against COMEX contracts. Presently, registered inventories comprise 24 percent of total warehouse stocks.

Generally speaking, an increase in COMEX registered inventories decreases the lease rate, while a spike in the TED spread sparks a hike in gold borrowing costs.

Think of it this way: The lease rate represents the price investors pay to hold physical gold as opposed to owning gold futures. Since investors can gain exposure to gold price movements by holding either physical gold or futures, they’re more willing to pay up for physical gold when counterparty risk runs high and when they’re less certain about collecting on derivatives.

Thus, perceptions of greater financial risk increase the monetary demand for gold. To satisfy this demand, physical gold needs to be either bid away from its competing uses or extracted from mines.

This winter, we’ve seen one-year gold lease rates crater near zero as bullion price wobbled. Since the top of the year, however, rates have spiked and are now knocking on the door at 0.30 percent. TED spreads were fairly predictive of the lease rate (see below) late last year but have been recently stymied.

Gold Lease Rates Vs. TED Spreads (1-Year)

Gold Lease Rates Vs. TED Spreads (1-Year)

We track the TED spread and gold lease rates in the Friday (“Inflation Scorecard”) editions of Brad’s Desktop.

The gold market’s clearly in flux. But the increase in gold’s lease rate is belying the rather benign picture painted by the TED spread.

The original article is published at

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