Comex Coverage Ratio and the BoJ Negative Interest Rate

January 29, 2016 1:50 pm

Comex Coverage Ratio on Monday and now the Bank of Japan announces negative interest rates – Is something afoot?

What the hell is going on? A negative interest rate, Comex Coverage records and LBMA errors? I’m keeping myself abreast of the news and I try to back away from sabre rattling, rhetoric and vicious rumours that circulate, but it makes no difference. In the last couple of weeks here in the office, we’ve had lots of old customers coming back in to purchase and all are saying the same thing, “There’s something going on”. I usually ignore or at least temper scaremongering sentiments as it can lead to rash decisions, especially when you are managing hundreds of thousands of pounds of stock, but for once I’m not certain.

Comex Coverage Ratio on Monday

The first trigger was on Monday. I had a call from a good client of mine; he’s an intelligent chap who keeps abreast of the news and we always have a decent conversation about gold. He called me to talk about the Comex Coverage Ratio and something he’d read. My ears pricked up.
The Comex is the main market for trading gold and other metals. The coverage ratio, broadly speaking is the term that measures the Comex’s ability to meet its financial positions – in this case delivering physical gold for the amount of contracts it holds. On Monday, the Coverage Ratio reached a record of 542 ounces of claims (bid/ask contracts) per ounce of deliverable gold. This unnerving record occurred whilst the banks adjusted their vault holdings: Scotia Mocatta -95K ounces, HSBC -85K ounces and Brinks -21K ounces.

LBM/CME Silver Fix on Thursday

The second trigger was the silver market in chaos on Thursday. The LBMA Silver Fix settled 84 cents below the spot and futures price at $13.58 per ounce. The LBMA daily benchmark is used by refiners, banks and traders to settle futures contracts. The CME began trading and the mid price was $14.415 and the spot was at $14.42 – a full 84 (-5.8%) cents below the Fix. The debacle has caused a lot of uncertainty in the market and many commentators have suggested an investigation into how the Fix was derived.

BoJ - Negative Interest Rate

BoJ announcement: Negative Interest Rate

Central Banks & the Negative Interest Rate

The final trigger comes from the central banks. The most obvious piece of news is the Bank of Japan (BoJ) and the change in interest rates to -0.1%. This isn’t the first time the BoJ have introduced negative interest rates – they applied the same measure in 1998 with little effect. Japan have struggled with minimal annual inflation of 0.2 per cent and are keen to strike out of the periodic deflationary quagmire. The BoJ are not the only one to follow this train of thought. The European Central Bank have a negative interest rate for their deposit facility, in essence charging banks 0.3 per cent on cash stored overnight. Likewise, the Swiss National Bank (SNB) invoked a negative interest rate of -0.75 per cent, again it equates to the SNB charging banks to hold cash with them.

It does raise the question. If the ECB, BoJ & SNB have negative interest rates, is it something the Bank of England will do? Negative interest rates in theory will hope stimulate loans by reducing borrowing costs, but if you begin to charge clients for holding their money – why give it to the bank in the first place?

Verdict:- This year is going to be tough on the British economy. The UK Government announced this week that it won’t be selling the final stake in Lloyds bank. The BoE also announced it won’t be raising interest rates just yet and now we are faced with negative interest rates. HSBC, Scotia Mocatta and Brinks have suddenly decided to change tack just days before BoJ announce a negative interest rate. At this rate, it may not be long until we are charged to have money in a bank and we won’t be able to get cash out at all.

Article by Michael Cooper
email:-Michael Cooper

 

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