According to this chart by Kitco, the 1 month gold lease rate was negative!
Of course, leasing gold from central banks is only available to politically connected insiders.
The sharp decline in gold lease rates indicates that central banks are dumping gold on the market, in order to push down the price. They are dumping so much gold that the lease rate is negative! They're leasing more gold than their politically connected buddies are willing to borrow!
I'll recap how you profit from gold leasing, and how gold leasing manipulates the gold price.
In a bona fide short sale, the short seller must deposit collateral equal to the value of the thing sold short. Suppose I short sell 100 shares of XYZ for $100/share. The proceeds of this short sale are $10,000. I can't just take this $10,000 and spend it. My broker puts this $10,000 in a special account. If the price of XYZ rises, I must put up more collateral. If the price of XYZ declines, then I can spend the profits.
For these gold leases, the central banks are requiring zero or negligible collateral. If there's a rapid increase in the price of gold, the gold borrower may default, and the central bank may be stuck.
Suppose I was buddies with a central bank. Here's how I profit. I borrow 1000 ounces of gold and sell it on the spot market. I buy gold futures. However, for the gold future, I only have to post collateral equal to approximately 5%-10% of the purchase price. I take the difference and invest it elsewhere, in bonds or in other assets. I am hedged, and make a practically guaranteed riskless profit.
Due to the lease, gold is sold on the spot market, pushing down the price.
The central bank carries the gold on its books at the face amount. The central bank has no obligation to disclose the amount of gold leased. This makes it hard for professional traders to determine how much gold has been leased and sold. If professional traders knew, they could profitably buy and correct for the market manipulation.
When the loans come due, the central banks don't demand repayment. They roll over the lease, extending the term. Alternatively, they sell the gold outright and don't demand repayment. If the central bank demanded repayment of the gold, this would drive up the gold price, which defeats the purpose of their manipulation in the first place! These leases can never be repaid! Even though the gold borrower can hedge via buying futures, they are under no legal obligation to do so. There have been instances where a central bank got shafted when a gold borrower defaulted.
A negative gold lease rate is a strong indication that banks are manipulating gold's price downward right now. They are flooding the market with gold.
I don't understand why gold investors whine about gold market manipulation. If you believe this to be true, buy gold! This may be an excellent buying opportunity.
Due to these complicated leasing arrangements, physical gold in your possession is the best investment. ETFs like GLD may be shafted if there's a default on the gold leasing market. GLD leases its gold for short selling. According to the GLD ETF's rules, the GLD shareholders take the loss in the event of a default.
Regrettably, I don't own any physical gold. I should buy some. However, manipulation of the gold market should continue for a few more years, until central banks exhaust their gold supplies.
According to Google Analytics, this post has been getting a surprising amount of traffic.
The Anonymous commenter pointed out an error. I thought that a negative gold lease rate meant a negative absolute rate. A negative gold lease rate actually means a negative rate relative to LIBOR. I couldn't find a source where this is clearly explained, but the correction appears to be right. In other words, a gold lease rate of -0.25% means that the gold lease rate is 0.25% less than LIBOR.
Still, a negative gold lease rate means that gold borrowers can make a guaranteed riskless profit. They borrow gold, sell it on the spot market, buy gold futures, and invest the proceeds in bonds. The gold borrower has a free put option to declare bankruptcy and default on the lease. The proceeds of the short sale could be invested in riskier assets than bonds.