05 February 2014

The gold lease rate is not an interest rate

Keith Weiner, president of the Gold Standard Institute USA, has the second post in a series responding to Tom Fischer's "Why gold's contango suggests central bank interference" which I blogged on here.

The post focuses on the gold lease rate and Keith starts off by saying that "to answer the question of how the gold interest rate is established today, we must look at who the actors are and the mechanics of what they do."

When looking at the actors using gold leasing he notes that "gold is not borrowed to finance purchase of long-term assets" but is only used by "businesses that specialize in gold, such as refiners, mints, and jewelers ... to enable them to carry inventory or hedge inventory" (such as the Perth Mint, which Keith notes is the only other business apart from his own fund business that keeps their accounting books in gold).

However, he concludes that gold specialists use of gold is "similar in some ways to Real Bills ... used to finance inventory that is moving predictably towards the consumer" and thus that the "gold “lease rate” is conceptually closer to the discount rate of Real Bills than the interest rate of bonds" because the gold lease rate "does not emerge from the actions of either savers or entrepreneurs. Nor does it arise from the actions of the consumer and the retail industry in general".

I think this way of looking at the gold lease rate is valuable to understanding the rate and thus GOFO and backwardation and what is may mean.

PS, I was encouraged to see Keith's article get picked up by a number of sites, like ZH, Gold Seek, Safe Haven, FSN and Acting Man, for what is content that is more intellectual and technical, rather than the usual gold to the moon type tabloid stuff.


Bron Suchecki said...

Regarding "keeps their accounting books in gold" I should be more specific, as Keith was, that we keep hybrid books. We run multiple, and parallel, general ledgers in AUD, gold, silver, platinum and palladium. For statutory reporting purposes we have to translate the metal ledgers into AUD equivalent values but otherwise the metal ledgers are not "monetised" and kept separately.

If all our staff and vendors requested payment in gold, then we could easily eliminate the AUD ledger and run our books primarily in gold.

obakesan said...

As a reader of Mad Magazine over the years I find ZeroHedge appeals for many of the same reasons