Does anyone understand the "Gold Lease Rate"? For example, right now Kitco shows 1-year gold lease rate at about 0.1390%. What does it mean? How is it used in practice? What affects this rate? What keeps arbitrage in control?Thanx

The lease rate is the cost of borrowing gold. In much the same way that individuals borrow dollars, pay an interest charge, and then return dollars to the lendor, gold bullion participants will borrow ozs of gold, pay a borrowing cost, and return the ozs of gold to the lendor. The debt is measured in terms of ozs as opposed to dollars. The value of the metal when it is being borrowed or returned is not a factor. The central banks are the main lendors of gold and the borrowers are the larger industry participants. The lending and borrowing of gold is pretty much reserved for bullion bankers, mining companies, and jewelry manufacturers. You can ask your bank manager to lend you 10 ozs of gold, but you would almost certainly draw a confused look on his face.

Thank you very much for that explanation.I wonder why the rates are so much smaller than interest rates.

QuoteOriginally posted by: CactusManThank you very much for that explanation.I wonder why the rates are so much smaller than interest rates.Yes, I was wondering the same thing. The fact that you are repaying 0.139% of an oz rather than of the principal does not really make up for the difference. I'm obviously not understanding something correctly here. Should this not amount to at least ~5% of the principal when it is borrowed?

I think if you check volatility over a long period of the 1oz gold over say 7 major currencies you probably would smaller then $1 in other currencies involved. This is the general low regarding market risk. And then currency rate balanced with bond price. It is interest rate parity.

QuoteOriginally posted by: listI think if you check volatility over a long period of the 1oz gold over say 7 major currencies you probably would smaller then $1 in other currencies involved. This is the general low regarding market risk. And then currency rate balanced with bond price. It is interest rate parity.Wait but what keeps someone from borrowing gold for a year, selling it right away, putting cash in treasuries, and then at the end buying it back and returning it?

Situation is the same as the relationship between Treasuries and corporate bonds. Gold should have less volatility then $ with respect to some accurate chosen index. This accurate index unfortunately does not exist yet. $-index does not quite flexible.

Say the gold lease rate is 1.5%. Say I borrow gold to hedge. Now, how exactly is this paid up in practice?

QuoteOriginally posted by: CactusManI wonder why the rates are so much smaller than interest rates.when you borrow in a fiat currency, inflation is a factor and that is reflected in the interest rates.

That makes sense, and is consistent with the idea that gold is a hedge against inflation.But, how in practice does the transaction work?Say I borrow 100 oz. gold for 1 year and 1-year gold lease rate is 1.5%. What am I one the hook for at the end of the year? I deliver 101.5 oz gold? The physical gold? Certificates? Cash? What usually happens?

If you lookHere you'll find an explanation of gold lease rates in the context of a discussion about Placer Dome's "hedging" book. It's really no different from interest rate parity, as was pointed out below. Pick up Culp's Risk Transfer and you'll find a reference to the more general theory of commodity-interest rates (own rates of interest) and the debate on the topic between Keynes, Sraffa and Hayek in the '30s.

Thank you.

This manager (www.goldlinkcapital.com.au) runs this fund (www.incomeplus.com.au) using a gold lease rate arb strategy. BAck 5 years ago they were making consistently good returns...though judging from the recent NAV, 'implode' would be putting mildly...down ~80%

Thanks. That looks great.

the fund i mentioned below has officially wound up. S&P called it a "change in investment strategy". Ha!Would be intrigued to hear from any commodity traders on how this fund could of got so wacked over. Someone clearly figured out their 'arb' and KO'd them within a few weeks. NAV chart here http://www.incomeplus.com.au/shareprices.htmlSad thing is this fund was publicly listed, so alot of mom and pops got burned, AFTER having been pillaged of 2% fee of course.