Monday, May 11, 2009

1-Month Gold Lease Rate Is Negative

I've never seen anything like this. The chart is from, showing gold lease rates for various duration since May 2008 to present. 1-Month lease rate is negative. So the entity that lend gold (usually a central bank, in the case of the US it is Federal Reserve) effectively gives you money so that you borrow gold from them and sell it in the open market. Borrowers are bullion banks (including Goldman Sachs, JP Morgan Chase, Deutsche Bank), large mining companies, and jewelry manufacturers. The latter two do this as a hedging operation, and the bullion banks claim they are also doing it as a hedging operation. (Gold bugs are always suspicious of their claim, though.)

These bullion banks and other firms borrow gold at a very low lease rate and sell it in the open market (= short gold), and invest the proceed in securities that yield higher returns. Sound familiar? It should; this is a carry trade. Lease rates have never been high, but now the shortest duration lease rate is negative. What does that mean? I don't know. Anyone know? Any guess?

Here's my guess: Federal Reserve, by charging negative lease rate for 1-month lease of gold, seems to want to encourage gold shorting. They want the physical gold price down. So they can sell short-term Treasuries at a higher price? From the chart, 1-month lease rate went below zero around mid March. Looking at the gold chart, it seems to have been successful in driving down the price of gold until mid April. Since then, gold is slowly edging up again.

I also read the rumor that Goldman Sachs and JP Morgan Chase are accumulating call option positions on gold and silver futures contracts. Hedge against their short position? Now I'm really confused...

**More on the topic, I found this article by James Turk, founder of
A Short History of the Gold Cartel


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