Low lease rates have caused a gold selloff as investors fear loss of profits. Investors holding gold assets fear sudden decreases in demand for gold and decreases in gold price. A negative gold lease rate means the banks is negative in the arbitrage between the gold forward rate and LIBOR. Bank B is losing money to exchange gold for dollars in the lease payment verses taking its dollars and exchanging them with other banks using the LIBOR to earn money. Gold leasing is a safety tactic. Banks lease out the gold as collateral to exchange for dollars. When banks lend gold at a loss there is the assumption that plenty of gold is available for leasing presumably a decreased desire to own gold. However, leasing gold, in reality, results from the banks resistance to sell gold. Central banks leasing of gold is used to increase dollar reserves but the market reacts to the sudden injection of gold by selling off. Bank A does not directly sell its gold and expects the gold to be returned. Gold is being used as a liquidity management tool. Banks in Italy and France have been active in lending gold. Large bullion dealing banks take gold on deposit from investors, central banks, and commercial banks. Central banks are the only banks that own gold in substantial amounts. Commercial banks are minimally involved with gold. The Bullion bank is the trusted third party between commercial banks seeking to create a contract. The bullion bank acts in behalf of its customers. Increased negative gold leasing means the banks fear deflation and are acting as if deflation is raging in.[Learn More ...]

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