So what is the gold lease market ?
Central banks don’t directly take their bullion to the market and lease it out. They use a vehicle called a bullion bank (BB). Although bullion banks are numerous, some of the more well known are Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank. The central banks loan gold to the BBs at a rate of approximately 1%. The BBs take it to the LBM and sell it on the open market. The BBs take the cash from selling the bullion and in turn buy Treasuries.
So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.
The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.
Now in a declining future gold price market this Leasing Out of Gold no doubt generated easy profits. In todays rising gold markets does it become more problemmatic? Maybe because the gold futures potentially will cost more to purchase and the treasuries are providing significantly less percentage return.
However observe that the FED is actually loaning out gold at a negative interest rate ? What ? Is this an error ?
So does the rising gold price not also allow the Bullion Banks (BB) to take increased cash out of the economy and with it buy increased government bonds?! It would actually appear that a “steady” rising gold price might be desired to accomplish just that?!! But why? Maybe to help soak up those excess reserves ? And the FED is paying negative interests to the BB to borrow gold and play this winning game !
Here is the updated Cheat Sheet.