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Gold lease rate

The gold lease rate (GLR) is a financial term that refers to the cost or interest rate on a gold-backed loan/swap. Although generally considered a physical safe haven asset, gold is still often traded in the same way as other currencies or assets by large-scale companies.

This means that gold can be traded on the stock market, in the form of ETFs or mining stocks. It also means that gold can be leased, in much the same way as lending/borrowing currencies. As a result of being leased with an attributed interest rate, gold can have an annual traditional yield, but only in these select transactions.

Gold leasing is done by large companies operating within the wholesale gold market, and lenders often take the form of bullion banks who lease gold in order to raise dollars for liquidity. This is done as a lease transaction, and the interest earned is called the gold lease rate.

Gold lease rate definition

The gold lease rate is defined as the London Interbank Offered Rate (LIBOR) minus the Gold Forward Offered Rate (GOFO). As an example, a 4% LIBOR minus a 1% GOFO would make a GLR of 3%.

The LBMA stopped publishing GOFO figures in January 2015, so the gold lease rate is no longer calculable from publicly available data today. It was also not a single fixed figure, and depended on the length of time for the lease transaction; 1, 2, 3, 6 and 12 months being the available options. The range would be fairly close however, generally going up the longer the lease would last.

Generally, the GLR was a low figure, typically at or below 4% (gold lease rates should in theory be lower than dollar interest rates). There are three significant trends however which can affect the GLR, and indicate financial instability:

1) There have been spikes in the GLR as high as 10%. This took place in 1999 for example, due to the Washington Agreement on Gold, which limited the amounts of gold central banks could buy.

2) The gold lease rate turned negative between 2009 - 2011 as a result of the financial crisis, and the introduction of the Zero Interest-Rate Policy (ZIRP). Because the lease rate is number-driven, these low/zero interest rates result in negative GLR, meaning that in effect lenders would be losing money to let people borrow their gold.

3) Lastly, when there is a shortage in metal liquidity, the GOFO could turn negative, and this has the effect of pushing the gold lease rate higher than the LIBOR. For example, a LIBOR of 1.5%, and a GOFO of minus 0.5% would result in a GLR of 2% ( 1.5 - -0.5 = 2 ). Lenders would therefore earn more interest by lending gold than by lending Dollars, another indication of something wrong in the financial system.

Gold chart graphic.

The figures for the GLR were published by the London Bullion Market Association, but it should be noted that the lease rate was purely an indication, and each bank/lender could use their own rate. Lending gold at negative interest rates, for example, would likely not have happened except in absolute extreme cases when liquidity was needed, and most banks would suspend lending when GLR fell below even 1%.

As mentioned earlier, the LBMA stopped publishing GOFO figures in January 2015. Instead, these figures are used privately between the companies involved in the transactions. Although this reduces transparency, there is little correlation between GLR and the physical gold spot price. Between 2009 and 2015, the low interest rates of the struggling world economy meant that short-term (one and two-month loan rates) were persistently negative, despite gold first reaching the previous Dollar price record before falling back. It is generally accepted now that the GLR did not act as any kind of definitive indicator as to future movement in the gold price.