Gold Cost of Carry?

Discussion in 'Commodity Futures' started by duece, Feb 20, 2006.

  1. duece


    Does anyone know how to compute the cost of carry for a gold contract? I think the storage/insurance costs are somewhere in the $4/month range but there are still some other components I'm missing...(interest rates, days to exp., etc). Is there a simple formula out there?
  2. I think you are getting at gold lease rates, which equal the intrinsic interest rate of gold minus the cost of money (usually 30d Treasuries).

    Currently, 30 day gold lease rates are in contango and equal to .096% APR for 30 days.

    So, if you have an ounce of gold at $550, and 'loan' that gold out for one year, you would receive $550 x .00174*12= $11.48. At the end of the year you receive that gold back. You can't sell it until you get it back, unless you unwind the loan and pay the spread, right?

    Does that answer your question?

    insurance and storage of the physical metal would be extra.

    See, and they told you (incorrectly) that physical metals don't have an interest rate.

    Of course, unless you are a central bank or a major player & trading size, it is probably not that important.
  3. duece



    Thanks for the reply. Couple of quick questions...

    Where did you get the 0.00174 from?

    In the case of a year, can you just use the the 12 month lease rate rather than the APR for 30 days?

    When you lend, the storage/insurance wouldn't apply as that is the borrower's concern?

    Lastly, if you take physical delivery in the form of a certificate, does the same formula apply?

    Thanks again. I'm trying to look at this from an arb perspective but not sure if there's anything there.
  4. duece


    Rearden Metal,

    Do you think there's anything there? At first glance I thought there may be a good opportunity. But given some of the components, it's a little more difficult to tell. Given New York, Chicago, Mini's, Tocom, GLD's, hunch is that there's got to be an edge somewhere.
  5. if you can turn yourself into a central banker, you can show bullion and paper equivalents as a line item, and lease the bullion out even if you don't have serial numbers on the bars to back it......

    if you dont own a bar and a serial number, there is always a chance that you own blue smoke on some ledger sheet someplace....

    the issue is currently being hashed in the marketplace....
  6. tomcole


    Gold cost of carry typically just refers to the contango. The cost of del'y, shipping etc needs to be done in reasonable amounts, eg, try going over 300 lots or more or your expenses will be higher than you expect. Also, if you take del'y you are responsible for storage charges and when you deliver you'll get your storage chrages pro-rated back to you.

    IMHO, the better trade to consider , is trading the gold switch as deliveries begin to occur. As you will be the "youngest" long, you taking del'y decreaes drastically, yet locals are amazingly scared to be anywhere near that position, so they will significantly overpay for switches to rollout of their longs. Just watch the switch prices intra-day as we get into deliveries. This trade also go away within a day or 2 of deliveries beginning to occur and you can cover your switch, usually with about 50 cents profit. But you need to do at least 100 for tis to make economic sense.
  7. kotika


    Maybe a simpler answer is enough? Just look at the quotes for COMEX gold futures, the contango is about 29.8$ per year, or 5.35% per year.

    Now here is a way of thinking which can produce an edge, if you think inflation will be less than 5.35%, you should on average make money shorting gold. This is because there is very sound evidence that in the long run, the gold price in dollars is increasing precisely at the inflation rate.

    Unfortunately the Sharpe ratio of this strategy is a bit low, because gold has at least 15% volatility lately. But you are thinking in the right direction, keep at it and you may be enlightened.

    Hope that helps
  8. kotika


    also, if you could borrow actual money at less than 5.35%, you could make risk-free profits by taking delivery of gold, selling futures and delivering the gold in one years time.

    The beauty of this method is that if you are an apocalyptic survivalist, and figure that there might be a disaster wiping out the banks, and the COMEX, you will get to keep the brick of gold for free. Now thats what they call a BONUS! :)