Gold Leasing - Chicago Gold and Silver Investing Fan Blog

Did you know that a central bank can lease gold? What does gold leasing mean?

A good way to answer this question is to give a simple theoretical example. Let's say the Austrian government has some gold. It goes to the central bank of England and deposits some of its gold. So London now has some Austrian gold sitting in its bank vaults.

Now what happens if England comes up with a brilliant idea. It says to Austria, what if I make a deal with you. I will lend (or lease) your gold to someone else,- let's say China. What I mean by lend is that England allows China to borrow the gold. In return for the right to borrow the gold, China pays England a fee. So China now has possession of the Austrian gold. In return for borrowing the gold it gives England a fee. So the Austrian gold is now shipped out of England and given to a Chinese vault. So the Austrian gold is now in Chinese hands which it will supposedly return to England. England gets from China an IOU from China saying that China will promise to return the gold someday to England. Until that time for return comes, China also promises to pay England a leasing fee. This is very much like a person who leases a car from a car dealer. The car dealer leases the vehicle to the person. The person pays a monthly leasing fee to? give them the right to have the leased vehicle.

So what are the potential problems with this gold leasing program A problem can arise when for example if England decides to sell the Austrian gold and has in its vault without the permission of Austria. Lets say they do this so as to surpress the price of gold. By selling an inordinate amount of gold on the market when it is not supposed to be available it increases the supply of gold in the market. When the supply increases and there are the amount of buyers or demand, then the price of gold decreases artificially.

Much of this type of gold leasing occurs in the London Bullion Market(LBM).? The London Bullion Market is a type of over the counter in which there is little or no transparency. This means that a buyer can buy a large amount of gold from the LBM with hardly anyone knowing. This type of gold leasing or buying is often called Gold Carry Trading.

For more on Gold Carry Trading and its three different forms read: Gold Carry Trading, What is it?

More on those other forms hopefully in another article.

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Source: http://neilski.typepad.com/chicago_gold_and_silver_i/2012/12/gold-leasing.html

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