Question: Gold Lease Rates, page-2

  1. 1,816 Posts.
    The lease rate is simply the rate of return gold owners want from those who borrow their gold from them.

    Short term rates (ie < 3 months) fluctuate wildly as they are affected by short term inventory levels.

    The longer term rates are more stable.

    Those that borrow the gold have to give it back to the lessor once the lease runs out.

    The lessee in the mean time normally sell the gold, and buy T-bonds, selelct stock... and then once the lease runs out they sell their investments and use that money to rebuy the gold, and give it back to the lessor.

    In practice, however, the leases are very frequently rolled over, thus the short (borrowed) positions are never closed... ie. the gold is always leased.

    The only problem is that when lease rates rise, and t-bonds yields fall, the spread between the two becomes too small to be profitable, and can even become negative.

    Additionally, when gold is rising, those that have borrowed the gold will have to pay a higher price to buy back (and close out their positions) in the future.

    This also eates into their return.

    If the POG rises enough (and if their not hedged), it can lead to them making serious loses on their arbitrage attempt.

    This is the danger... the massive amount to lent gold out there, that's been perpetually rolled over may have to be covered in the near future if the POG continues to rise.

    What the total amout of gold lent out?

    No one actually knows.
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