01 November 2011

Negative Lease Rates

Very good two page analysis of negative lease rates by Pollitt & Co’s John Paul Koning, including central bank activity in this market. Quote:

What sort of “non-banks” might be supplying leased gold to the market-making banks at these extremely negative rates? As we already pointed out, central banks seem willing to lend only at positive rates, which leaves only one other source: the investing public. ...

The public effectively lends gold to banks when they deposit their physical gold in unallocated form at a bank. ... The negative interest rate received by the borrowing bank is probably in the form of client fees or bid-ask spreads. ...

By serving as the cheapest source of lent gold, the investing public has effectively priced central banks out of the gold lending market.


The Perth Mint does a bit of leasing and certainly no one is paying us to borrow metal. However, unallocated accounts at bullion banks do attract an account keeping fee, as Koning notes, and this is effectively paying the bank to use your metal.

Another factor as to why investors may be prepared to pay people to borrow their metal is that it can be cheaper than the costs of storing it (ie Allocated). I do also think the derived negative rates are a theoretical interbank no counterparty risk rate. Once you add in a premium for the counterparty risk the actual rate is positive.

Finally, there is a mathematical relationship/arbitrage between the futures markets and GOFO (and thus lease rates) and this could also have an impact (not something I've been following too closely).

1 comment:

Anonymous said...

This idea of leasing out gold seems very risky. Some commentators say that a lot of the gold previously leased out by the central banks will never be returned, because it is now hanging around the neck of indian women. And for the bullion banks to try and buy back all the gold to return it to the central banks is now nigh impossible, as it would drive the price up way too high. So apparently (some people say), the central banks know that they will not be getting this gold back. Again, Jim Rickards has said that the USA government might one day confiscate all german gold stored in america, and just give them a paper receipt. If there is one thing the american government has shown us with respect to gold, it is that they are thoroughly untrustworthy.