Negative Gold Lease Rate

[fsk]

I published an article on negative gold lease rates on my blog (http://fskrealityguide.blogspot.com/2009/10/gold-lease-rate-is-negative-again.html). I'm now confused.

If the gold lease rate is negative, doesn't that mean that the banksters are literally paying people to borrow their gold? It isn't a negative absolute rate, but doesn't a negative lease rate mean that the gold borrower can make a guaranteed riskless profit?

I'm confused about the details now. How does a negative lease rate lead to profits for the gold borrower? Please give full details.

[47Protons]

I published an article on negative gold lease rates on my blog (http://fskrealityguide.blogspot.com/2009/10/gold-lease-rate-is-negative-again.html). I'm now confused.

If the gold lease rate is negative, doesn't that mean that the banksters are literally paying people to borrow their gold? It isn't a negative absolute rate, but doesn't a negative lease rate mean that the gold borrower can make a guaranteed riskless profit?

I'm confused about the details now. How does a negative lease rate lead to profits for the gold borrower? Please give full details.

Why do you write a blog about a topic you obviously don't understand very well?

[fsk]

I thought I did understand it. A negative gold lease rate implies that the gold lenders are giving away money to the gold borrower.

I thought I understood the mechanics of that. You sell the gold at spot, buy a future, and invest the proceeds. I'm slightly confused about the details now.

It seems that the gold borrower is effectively borrowing money at 2% or 3%, a very attractive rate.

If you know better than me, then point out the error.

[Ragnarok]

What happens when you have to pay back the gold?

R.

[fsk]

If you hedged with a future, you just take delivery of the future and repay the gold. In the meantime, you effectively borrowed money cheaply.

Normally, the banks sell the gold outright or roll over the lease, instead of demanding their gold back.

Alternatively, you can choose to not hedge. If the price of gold rises sharply, then you can declare bankruptcy and default on the lease.

I'm disappointed that there were no useful responses. I was hoping someone here understood how gold leases work and how the gold borrower profits.

[Curtman]

Where are you getting this negative lease rate from? It has been pretty stable for a while now.
When the lease rate goes down the cost of leasing is cheaper, shorts get the signal and drive down gold and if you are long you better be paying attention and get ready to hold on to your ass.
When it bases or goes up the opposite is true and that is what you will be seeing for a while now.

[fsk]

You can look up lease rate charts on Kitco. (http://www.kitco.com/market/LFrate.html) Short-term lease rates are negative.

Negative lease rates are a symptom of gold market manipulation. Central banks lend their gold to manipulate the price down.

Insiders borrow the gold, because they can profit. The gold borrower sells the gold at spot, buys a future, and invests the proceeds.

My question was "What exactly is the mechanism by which gold leases allow insiders to profit?" I'm pretty sure that the gold borrower is getting a sweetheart deal, but I'm curious about the exact details.

I thought I understood the details. A commenter on my blog questioned my analysis, so I was looking for a definitive answer. It seems that nobody here knows the answer either. I'll go ask on Kitco.

[elroy]

My understanding is that gold lease rates are typically much lower than interest rates.

So instead of borrowing $$, you borrow the gold and sell it.

Than you invest the proceeds of the gold sale.

Why borrow $$ at 5% when you can borrow gold at 1%.

And they keep trying to tell us that gold isn't real money.

[Sanka]

This is my understanding, Correct me if I'm wrong.
A lease rate is the extra money you pay to borrow something instead of buying it. If a lease rate is negative, it just means it's cheaper to borrow it instead of buy it.

Suppose the market value of a given square footage apartment is $500 per month.
Now what if you wanted to buy that apartment...and your mortgage is 625 a month, but people are renting similar space for $575 a month.

Then the lease rate on the property is 75/500 or 15%. But as you can see, the mortgage (just go with it) rate is 25% (125/500)...

Someone might say 'lease rates are negative!' because the buy rate is 10% higher.

So if gold lease rates are negative, it just means that if you short gold, you will make *lease rate* per year/per period over someone that buys gold and sells it.

I know it's more complicated, because the value of the dollar is falling relative to gold from perior to period. But at the same time, the supply of gold on the market is rising, according to those that say lease rates are negative. This would put downard pressure on gold prices, but dollar inflation would put upward pressure on gold prices as well. Those two issues factor into the lease rate, as does the fed funds rate. But when you draw your conclusions and say the lease rate is positive or negative, I'm pretty sure it's just like the analogy.

[SomeSilver]

When someone leases Gold, do they actually cart away the physical Gold;
or do they merely get a piece of paper stating they "have" x ounces which
are kept in the bank's vault?

[Fullpower]

They use a negative lease rate when they are trying to move 400 ounce gold plated tungsten bars, just like a big sale on poor quality Xhinese shoes at Walmart.