This Blog Has Moved!

My blog has moved. Check out my new blog at

Your Ad Here

Tuesday, October 20, 2009

The Gold Lease Rate is Negative Again!

In this thread on Reddit, someone was pointing out that gold lease rates are negative again! Someone was citing my post on The Gold Lease Rate is Negative! in the comments. Ironically, other people citing my blog on Reddit has been more effective than me attempting to promote my own blog on Reddit. I decided to contribute a comment. "The Gold Lease Rate is Negative!" is #8 on my "Best of FSK" post list, so it's time for an updated version.

Clarifying, the gold lease rate is not an absolute rate. It is a relative rate. If LIBOR is 0.5% and the "gold lease rate" is -0.25%, then the borrower is paying 0.25% interest on his loan.

I used to think that the gold lease rate was an absolute rate. That was wrong. It's a rate relative to LIBOR. According to this page, LIBOR is currently approximately 0.5%. The exact value is irrelevant to the point I'm making, so I'll use 0.5% for this example.

In the USA, the Fed Funds Rate is currently 0%-0.25%. LIBOR is based on interest rates set by England's central bank credit monopoly. Interest rates in the "industrialized" countries usually are relatively close, lest currency speculators make a guaranteed riskless profit by borrowing in one currency and lending in another. The international monetary system is specifically set up to facilitate looting by insiders and speculators, but if the discrepancy is too great then the theft starts to become too obvious.

Continuing the above example, if you borrow $1M of gold, then you owe $2.5k of interest per year.

If gold lease rates are negative, then the gold borrower can make a guaranteed riskless profit. You borrow gold, sell it on the spot market, buy a future, and invest the sale proceeds in bonds (earning LIBOR). You pay 0.25% on the lease, but you earn 0.5% on the bond investment, making a guaranteed riskless profit of 0.25%.

Only insiders may borrow from central banks at the "official" lease rate. This lucrative guaranteed riskless trade is only available to insiders.

I remember an instance where someone borrowed a bunch of gold for an art exhibit. They paid a lease rate of 5%-10%. Non-insiders may not borrow gold on favorable terms.

The gold borrower can profit even more, if he makes riskier investments than bonds. If his investments don't pan out, or the price of gold sharply rises, then the gold borrower can declare bankruptcy and default on the lease.

Why do central banks lend their gold? The "official" reason is "We might as well earn a return of 0.25%, rather than have the gold sit in our vault." The real reason is that the gold lease is an attempt to manipulate the gold price downwards.

A negative gold lease rate is a symptom that the banksters are saying "OMFG!! The price of gold is rising too quickly!! People might start realizing our paper money is worthless!! We'd better start pushing down the price of gold!!"

By leasing their gold, the supply of spot gold is increased, pushing down the price. The future price is derived from the spot price, so the lease also pushes down future prices. If interest rates are 0.5%, and the spot price is $1000, then the 1 year future price should be approximately $1005. If the one year future price were much greater than $1005, then someone could make a guaranteed riskless profit by borrowing $1000 at 0.5%, buying physical gold at spot, paying the cost of storing gold for a year, and short selling a future.

When the lease comes due, the central bank sells the gold or rolls over the lease, extending the term. The gold is "lent", but the central bank insiders have no intention of ever demanding the physical return of the bank's gold.

The central bank insiders have no obligation to publicly disclose the lease. They still carry the gold on their books at the full face amount, even though the gold is no longer physically present in their vault. This makes it hard for professional gold traders to determine how much market manipulation is occurring. This makes it hard for professional gold traders to buy to counteract abusive gold leases.

Also, the gold lease is not a riskless transaction for the central bank. If the price of gold rises sharply, then the borrower might default on the lease. There have been instances where a central bank was stuck, when a gold borrower defaulted.

The gold lease is not a bona fide short sale. In a genuine short sale, collateral equal in value to the borrowed goods must be deposited. If you borrow $1M of gold, then you should not be allowed to take the $1M and invest it however you please; the $1M should be deposited as collateral for the lease. Continuing the above example, if the price of gold rises 10%, then the borrower should be required to deposit 10% more collateral. If collateral were required, then the gold borrower could not make a guaranteed riskless profit; they'd be subject to margin calls when the price of gold rises. Central banks don't demand collateral for the gold leases, encouraging risky behavior by gold borrowers. The people borrowing gold from central banks are themselves insiders, so they get favorable terms.

If I borrow on margin to buy stock, I have to pay immediately if the price of the stock falls or my broker will sell my stock and I lose everything. If an insider borrows gold and the price of gold rises, they are not obligated to post more collateral. Insiders get favorable treatment compared to everyone else.

If necessary, the rules of the futures exchange will be changed if the price of gold sharply rises. This is an example of what happened to the Hunt Brothers. The banksters have repeatedly acted to cheat long speculators, when precious metal prices sharply rise.

I don't understand why writers on websites like GATA and Kitco say "Waah!! The banksters are manipulating the price of gold downwards!" If you believe this to be true, then you should buy as much gold as you can and take physical delivery. Appreciate that the banksters are giving you a discount on your gold purchase. If enough people buy gold and take physical delivery, then the lie of gold market manipulation will be exposed.

If you buy an ETF like GLD, then your purchase isn't necessarily reflected in the official price of gold. The GLD ETF may not have as much physical gold as it claims to have. The rules of the GLD ETF allow the fund to lend its gold to short-sellers. If there is a default on the paper gold leasing market, then the fund shareholders of GLD are stuck with the loss.

From 1933 to 1975, private ownership of gold was illegal. In 1975, gold ownership was declared legal, but most of the world's gold supply was controlled by the banksters. After the spike in the price of gold in the early 1980s, the banksters adopted a policy of gold price manipulation. They are gradually selling and leasing their gold reserves, to keep the FRN-denominated price of gold down. If gold is discredited as an investment, then people will accept worthless State paper investments.

People cite the spike in gold's price in the early 80s as evidence that "Gold investors are idiots!" Before that spike, the banksters decided to hoard their gold, because it was the only valuable asset they owned. After the spike, the banksters decided to slowly sell/lease their gold, to keep the price down.

In addition to their gold market manipulation, the banksters order their comedians on the Communism Channel to say "Gold investors are idiots!" at every possible opportunity. It's amusingly pathetic how they denigrate physical gold investors at every opportunity. Now, the comedians are saying "Gold just went up a lot!! It's too late to buy!! There's no point in buying gold now!!" If the price of gold goes down, then the comedians say "Gold went down today!! Gold investors are idiots!!" Whether the price of gold goes up or down, professional comedians come up with an excuse for why gold investors are idiots.

The long-term performance of gold vs. the stock market is not seriously discussed on the Communism Channel. A comparison before 1975 is invalid, because gold ownership was illegal. The 70s-90s are invalid for comparison to the present, because the banksters were selling/leasing their gold to keep down the price. They have nearly exhausted their gold reserves, limiting their ability to manipulate the FRN-denominated price of gold.

Eventually, the banksters will use up their gold reserves. Their gold market manipulation will end. The only way to protect yourself is to buy physical gold and take delivery. When the financial system collapses, ETFs like GLD will be worthless. When the financial system collapses, COMEX warehouse receipts will probably be worthless. Only physical metal in your possession will preserve your wealth when the State collapses.

A negative gold lease rate is a symptom of gold market manipulation. The FRN-denominated price of gold has sharply risen recently. The banksters are desperate to keep the price of gold down. Despite gold market manipulation, gold has outperformed the S&P 500 by a huge margin over the past 10 years.

The best way to protect your savings is to buy physical gold and take delivery. I'd convert all my State paper investments to gold and silver, if only I could solve the "Where to store it?" problem.


Anonymous said...

The SEC may be finally doing something proactive. Just read SEC requested a copy of STOCK SHOCK--new movie about market manipulation.

Anonymous said...

"Where to store it" problem? FSK, you're selling your readers dime a dozen to ads services, and yet, you proclaim that there is a problem of storing gold that you could have obtained by converting all FRNs you have..???

What is it, one ounce? A one tenth of an ounce? How hard is it to store that?

Even if you had a million FRNs, this would equate roughly to a thousand ounces, which is 31 kilo. With gold being 20 times heavier than water, this would equate to about 1.5 liters in volume.

Where to hide a Coke bottle sized object? Are you kidding me?

You'd rather keep the FRNs, and risk going shirtless?

Are you fnording here?

Anonymous said...

Lease rates being negative does not equal a riskless trade. If you buy a future (which is more expensive than spot) after selling the spot gold you borrowed, you lose money and don't have any to invest at the LIBOR rate (you bought a future remember?). Study some basic modern finance texts please.

FSK said...

It's always annoying to see pro-State trolling by people who think they know economics but don't.

The flaw in your counter-argument is that, when you buy a future, the margin requirement is only 5% or less of the value. If you buy a gold future for $1000/ounce, you only must post $50/ounce in margin collateral. You may spend the remaining $950/ounce however you please. You don't have to pay the remaining $950/ounce until delivery.

I don't know the exact margin requirement, but I believe it's 5%-10%, with institutional investors getting a better deal than retail investors. The margin rules are subject to change at any time. That trick was used to cheat the Hunt Brothers.

There is one slight error. I didn't include the contango on the gold future. Due to the "time value" of money, the price of a 1 year gold future should be slightly more than the spot price, a difference equal to the 1 year interest rate. Interest rates are currently very low, making the contango negligible.

As usual, let's calculate a specific example. The 1 year gold lease rate is -0.25%. One year LIBOR is 1%. The spot price of gold is $1000/oz. The contango is 1%, making the one year future price $1010/oz.

You borrow gold at an absolute rate of 0.75%, yielding $1000/oz. You buy a 1 year future, paying $50/oz in margin requirements. You have $950/oz to invest however you please. When the future is due, you owe an additional $960/oz. You pay $7.5/oz in interest on your lease.

You have borrowed $950 for a year at a cost of $17.5. This is an effective interest rate of 1.84%.

There is no requirement that the gold sale proceeds be invested in bonds earning LIBOR. The proceeds could be invested in riskier assets, making this trade more desirable. If the trade doesn't work, the gold borrower can declare bankruptcy and default.

There is no requirement that the gold borrower hedge at all. If the price of gold sharply rises, then the gold borrower can declare bankruptcy and default.

If I want to borrow at 1.84% to invest in my blogging business I can't. Gold leasing allows insiders to borrow at very favorable terms.

When I add in the cost of contango, the gold lease isn't completely riskless. However, the gold borrower is borrowing money at a very favorable interest rate.

Connor said...

Well, I'm not a pro-state troll, but that's beside the point. You pay interest on futures bought on margin, with principal equal to the notional value of the contract, and generally at the LIBOR rate, so your counter-argument is still flawed. You don't get margin for free. Read J. Orlin Gabbe's book on international finance of the same name (he's definitely not a statist troll).

FSK said...

When I studied futures, you weren't charged interest on the margin portion. The interest is factored into the contango price of the future. If interest were charged on margin loans for futures, then there would be no contango.

The reason you aren't charged interest is that you don't technically owe the remainder until delivery.

Continuing the above example, even if you add 1%, the gold borrower is still borrowing money at very attractive rates. I don't think it's correct to add that 1%.

Can you cite a good web-based source? I'm not reading a finance book just for one detail. I looked into this, and I thought you weren't charged interest.

The rules might be different for retail investors and institutional investors. Retail investors usually get less favorable terms.

Connor said...

Margin is being lent to you, and it isn't a free lunch, so even if you are an institutional investor, you'll pay the LIBOR rate or more, it being folded into (hidden in) the future's margin rate is irrelevant. Currently LIBOR is very low, which is why futures margin rates are very low.

To quote "Contango" on Wikipedia,

"A contango is normal for a non-perishable commodity which has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up, less income from leasing out the commodity if possible (e.g. gold)."

Right now the difference between 1-month LIBOR and GOFO (what's quoted as a lease rate on Kitco, etc.) is -0.0045%. Sorry, but I can get better interest on my chequing account, I'm not bothering to arbitrage that, and neither is anyone else.

Your scenario is bogus (it's a particularily low-yield carry trade with lots of transaction costs), if you look at all the costs involved, to institutional investors or even bank insiders who might have near-zero transaction costs, there's still no arbitrage here.

As for there being any good web-based resources, if there were, I'd imagine there wouldn't be as much FUD about the gold lease rate being negative having ominous overtones. It just means there's low demand to lease gold (maybe because the price in USD is quite high).

Imminent collapse of the monetary system isn't in the cards, inter-bank interest rates would be a lot *higher* if it were, and the gold lease rate would be as well (and it would be positive relative to LIBOR).

Right now the spike in commodity indicies versus the ICE dollar index is more interesting.

I would counter that you haven't exchanged all your dollars into gold or silver or platinum or whatever because you haven't solved the problem of exchanging it for stuff you actually want, not because of the "storage problem" as you can get a Kitco pool account or Perth Mint certificates or store it at a Swiss bank or just put it in a safe in your home and not tell anyone about it fairly easily.

Anonymous said...

Who said that one will be borrowing any money to "lease" gold?

Rich and connected insiders simply use money already in their possession to lease gold at an insider-special rates from the government.

They do get paid by the government for doing it (negative rate).

It largely doesn't matter at what rate the gold is leased! The rate itself is a fnord, that covers up the fact that the gold is leased TO SPECIAL INTEREST ONLY. Just like in Pat Tillman case, the fnord is that he died of friendly fire, it cover ups the fact that he was killed, by presumption that being killed by friendly fire is shameful for army to admit. Here is a newsflash, Army is not a person, it doesn't give a fnck.

So, similarly the gold lease rate is a fnord, to cover up the fact that you and I can not lease gold, but only nobility can. The fact that the rate become negative is simply an indication of an increased interest of general public in gold and leasing gold, and so, a more controversial cover up is required to distract from nobility factor, thus, the rate goes negative.

Today, I would love to lease gold from the government at ANY rate, knowing that this government has a year or two to live. There will be nobody to return it to. So, if you lease it today, then ALL that you going to pay is the rate. You will keep the gold for rate fee only.

Everyone who knows about this, is crazy converting soon to be worthless usd to gold. It is unfair, that the nobility gets such a sweet and special treatment, getting the gold confiscated from the people, essentially for free, so that after the collapse, they can remain to be the nobility.

Anonymous said...

FSK, I am not Chrono. I don't know what or who that is. And, I did not put any words in your mouth. I do appreciate you giving a thought to my argument.

I was wrong, because I did not notice that you were talking about silver, not gold. I noticed it later.

I brought up ads, not to question your profit strategies, but to estimate your networth. I think it is less than considerable, because you work for pennies. This tells me you have tons of time, and that tells me that you don't have money. Not that it is bad in itself, but you shouldn't have any problem hiding your networth.

I did not myself clear. You should not hide anything but boobie traps in your house. Better yet, nothing at all. That coke bottle? Hide somewhere else. A forest, for instance. Make sure the metal detector background is matching the area. Also, have a second place where you hide a "bad surprise", and a third place, where you hide a loaded machine. Don't laugh on these two. You will appreciate their existence, if you think about all possible outcomes, or later on, if you trusted someone mistakenly.

Anonymous said...

"You borrow gold, sell it on the spot market, buy a future, and invest the sale proceeds in bonds (earning LIBOR). You pay 0.25% on the lease, but you earn 0.5% on the bond investment, making a guaranteed riskless profit of 0.25%."

But it's not riskless. You might not get your gold delivered since there are more gold futures than gold to back it. COMEX is a Fractional Reserve Commodities Exchange.

This Blog Has Moved!

My blog has moved. Check out my new blog at