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Copper Catcher
Administrator
USA
2092 Posts |
 Posted - 04/28/2009 : 09:43:03
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I'm not sure if this has been posted before but I thought I'd share this article. It is very interesting!
For the vast majority of us, gold is a lump of metal that does nothing. As we said before in Is gold an investment?,
...since gold is a boring, inert metal that does not have much pragmatic use and does not pay dividends, income or interests, it is completely unfit for ‘investment.’
But for a certain class of gold owners, they DO earn interests on gold. Right now, instead of receiving interest for lending out gold, they are paying people to borrow gold. Who are these gold owners?
They are the central banks. The ‘interest rates’ on gold is the gold lease rates. Typically, central banks lend out gold through bullion banks, which then pass them on to the market. Eventually, the gold has to be repaid with ‘interest’ paid with more gold. Sometimes gold producers pre-sell their gold by borrowing them from central banks first and then repaying those borrowed gold (with interests, of course) later through their own production.
Right now, at this point of writing, the gold lease rate for 1 month is -0.0483%. This negative lease rate has been going on since last week. For silver, the lease rate for 1 month and 2 month is -0.04% and -0.0379% respectively. This is a very curious phenomenon. In other words, central banks are paying for others (e.g. bullion banks, gold miners, hedge funds, etc) to borrow gold to sell to the market. In other words, central banks are paying for others to ’short’ gold.
That could be the reason why gold prices had been falling recently.
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Also read this....
Gold Carry Trade
A carry trade where you borrow and pay interest in order to buy something else that has higher interest. The gold carry trade works as follows. A central bank loans a bank (sometimes called a bullion bank) some gold. The gold lease rate is usually very low. The bullion bank immediately sells the gold and invests in securities with a higher rate of return, such as government long-term bonds. The carry return is the return on the bonds minus the gold lease rate. However, this trade is risky on two dimensions. First, if the bullion bank invested in long-term bonds and the interest rate goes up, the trade could be unprofitable. More seriously, the bullion bank has effectively sold the gold short. If the loan is called by the Central bank and if gold has risen in value, the bullion bank will have to go into the market and purchase higher priced gold. Indeed, if many banks are short, the unwinding of the gold carry trade could drive the gold price even higher.
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Get paid to borrow gold and silver?
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