Gold Leasing

Gold "lease rate" definition: The "lease rate" (i.e. defined as Libor - GOFO, or Gold Forward Offered Rate) is the net rate of interest a bullion bank like JPMorgan (or HSBC) pays to a central bank like the Fed to borrow gold. The bank then takes the gold and sells it on the LBMA or the Comex. After painting the tape and initiating the beatdown, the bank can then cover the new short position, thereby reclaiming the gold it borrowed for return to the central bank. With one-month lease rates at -0.5% (on 12/14/2011), the bank actually gets paid interest by the lender to borrow the gold. Its a win-win for JPMorgan et al. They make interest (which they like) and prop desk trading profits (which they like even more).

European banks are in immense dollar liquidity stress (as of late 2011). They have leased gold to sellers or sold outright against the dollar POG (Price of Gold) in order to raise dollars.

[The collapse of the lease rate (on 12/14/2011) is indicative of high interest by the lessors of gold, aka holders. Global banks are in the paper-(e)dollar world. That is their god. If you have an account with them and you want to hold physical gold, they do not care. They will lease, rehypothecate, sell what you own, even illegally, to keep themselves alive. Banks and hedge funds, even those physically holding client assets which may be physical gold bars, will sell anything they can for paper liquidity to stay alive. To them, "cash is king" because those accounting figures are the difference between being employed and operating and not.]

Negative lease rates mean one has to pay for the "privilege" of lending out one's gold as collateral - a prima facie collateral crunch. The lower the lease rate, the greater the use of gold as a source of liquidity - and since the indicator is public - it is all too easy for entities that do have liquidity to game the spread and force selloffs by those who are telegraphing they are in dire straits and will sell their gold at any price if forced, to prevent a (dollar) liquidity collapse.

Liquidating or repaying dollar-debt extinguishes dollars. The result is a dollar shortage. This is what is taking place right now. However, it leaves out the desire of those who hold non-currency assets to convert at whatever rate into currency. With non-currency assets 100x the level of currency, the question is whether the monetary authorities are able -- or willing -- to keep up with the rate of deleveraging. Since 2007 until earlier this year, the answer has been yes, but with the fiscal authorities meddling in monetary policy, the ability of central banks to meet the rate of redemption is now questionable. The consequence is negative lease rates for a lot of things besides gold--i.e. real estate, wages, derivatives, anything that isn't currency.

Deleveraging (as a consequence of excessive debt) is necessary but the same fiscal authorities who refuse to widen money access also refuse to engage in creditor restructuring. Chaotic deleveraging means all assets are wiped out in excess of base money, excess indebtedness is charged against output (GDP). The magnitude of the deleveraging will overwhelm the attempts of the central banks to print their way out. Once they have extinguished enough of the debt, then the danger of hyperinflation will be real.

After a lease rate-induced selloff such as this (on 12/14/2011), the key to confidently calling a bottom will not only be technical price levels, but a lessening of negative lease rates, as well. IF, by later this week or early next, we see gold at 1550, silver at 25-26 and one-month lease rates back up to -0.3% or so, we'll be able to call another bottom similar to January. Stay tuned. See here.

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