The most basic form of precious-metal leasing involves central banks such as the Fed taking their gold or silver to an intermediary institution known as a “bullion bank.” Major firms such as Bank of America, Barclays, Citigroup, Goldman Sachs, JP Morgan Chase, and UBS all operate as bullion banks.
Typically, the bullion banks might pay a 1% interest rate on the gold or silver, with the promise to return it at a specified date. The bullion bank then takes the precious metal and sells it on the open market, using the proceeds to buy Treasury bonds.
Typically, the bullion banks might pay a 1% interest rate on the gold or silver, with the promise to return it at a specified date. The bullion bank then takes the precious metal and sells it on the open market, using the proceeds to buy Treasury bonds.
But what if the precious metal rises in price and the bullion bank has to pay more for the gold or silver it returns than it received for the gold or silver that it borrowed? To address this concern, bullion banks use the futures market to lock in a price and delivery date of the necessary gold or silver. This cuts into their profit margins but takes all of the risk out. A 1-2% net return with zero risk is a great deal for them. As for the metal lender, a 1% return is better than the 0% return gold and silver earn in underground bank vaults. It’s a win-win for the central bank and the bullion bank—but some argue individual investors lose.
Critics of metal leasing say, because gold bullion and silver leasing artificially increases the supply of the precious metals for industrial, commercial, and investment uses, thus holding down the prices of the commodities. Central banks and the bullion banks are insensitive to the price of gold bullion or silver—profits are locked in and guaranteed—so this distorts the real supply and demand relationship between buyers and sellers.
Critics of metal leasing say, because gold bullion and silver leasing artificially increases the supply of the precious metals for industrial, commercial, and investment uses, thus holding down the prices of the commodities. Central banks and the bullion banks are insensitive to the price of gold bullion or silver—profits are locked in and guaranteed—so this distorts the real supply and demand relationship between buyers and sellers.
But could it be that holding down the price of precious metals is not just a side effect, but the intended effect of leasing? After all, just reconsider Greenspan’s words: “Central banks stand ready to lease gold in increasing quantities should the price rise.” It’s quite possible that, in the absence of gold leasing, government fiat currencies would appear virtually worthless as they rapidly depreciate against gold bullion.
More information can be found online at http://www.goldbullionadvisors.com
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