Acme Inc. To avoid the price risk, most gold businesses would sell short futures contracts. This solves the price risk problem, but it brings its own costs and risks, such as having to borrow additional cash for the margin on the futures contract and constant need to roll their short futures contracts. Acme would benefit greatly from a gold lease.
It simplifies their financing, eliminates price risk along with the need for hedging, and saves them money. In other words, possession of the gold without the problems of owning it. We work exclusively with companies that use gold productively —and have physical gold. We will not offer a gold lease that could be used for short selling or other derivative transactions.
We work out the best type of lease to finance the business, and put together the terms of the deal. We present the terms of the lease and the result of our due diligence to investors for review. The Fed slashed the federal funds rate to about zero in December and maintained it at such level until December see the chart below. However, that hike was modest, so it did not normalize the level of interest rates. Sign up for free.
Discover what market correlations are, and how you can use them to your advantage. Within definitions. Related terms: Gold as an Investment Gold had served as money for thousands of years until when the gold standard was abandoned for a fiat currency system.
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There is a charge which is determined by supply and demand for the specific location. Of course this is the kind of thing that can only be done if the two parties share the same interest. It is incumbent on anyone in the precious metals industry to establish trade relationships in the major markets that enable them to participate.
What does a swap have to do with leasing? If you are asking then I still have your interest! The reason is that location swap transactions happen to be a major part of the ability of institutions to lease or lend their metal to another party is because it increases the size of the available market.
So how does someone end up in the gold leasing business? In this case we can say a bank involved in precious metals, a trading company or precious metals refining business would have natural flow of business that would enable them to be in a position where they could offer leasing.
In the first example we will call this primary entity Company A. Company A has customers who hold metals on deposit. It is in reality no different that when you leave your money with a banking institution.
The only difference is that the gold does not multiply through the banking system as money does. Because the sum total of physical metal does not change.
Let us make believe you are Company A and you have 10, ounces of gold deposited by your customers. Of those, you are able to lend out 8, ounces easily.
But now you have an excess. So you calculate the earnings if you sell the gold outright in the market, and deposit or lend the cash to another borrower. In the current market environment, this could be profitable. You would pocket the premium for selling immediate gold, and buy the future delivery cheaper. Over that time period, you also lend the cash raised from the sale as well. It is a bonanza! But it does not happen like this most of the time, and besides — Company A has multiple transactions and commitments in gold.
So the picture I projected, though nice, is not always that simple. This is the typical state of the gold and other precious metals markets. It means that the future or forward price is higher than the near term. So if you were Company A, then the spread would cost you money to hedge your position, and it would cost you more than you would earn, too.
What to do? You contact other people in the market place — outside your own circle of gold borrowing clients — and it happens that you can lend it to another party that has need for the gold in New York. Lease rates are likely to remain low.
The platinum market is the polar opposite to gold, but the principles remain the same. The main problem facing both the spot and the futures markets is the depletion of above-ground stocks and the lack of a lender of last resort. Charts 3 and 4, at right, illustrate the point clearly. For gold, calculated cumulative above-ground stocks have barely changed over the past 30 years, staying around 32, tonnes, but the platinum inventory levels swing between zero and 30 tonnes.
Although the quantity of inventory held prior to in platinum is unknown, we believe that current inventory levels are close to zero.
What is more alarming is that with current demand projection the market is forecast to enter uncharted territory with regard to supply and demand deficits. Price risks remain skewed to the upside and there does not appear to be much prospect of a net inventory accumulation at any stage in the next few years coming in to ease the borrowing market.
The volume of material traded in Japan means that the platinum lease rate takes a leading role in driving spot prices. This gives the public a chance to trade out of the position profitably at some stage in the ensuing 11 months. If the Japanese general public JGP sell futures, this position will be offset against trade house long positions, and these trade houses will sell spot loco Zurich to mitigate the month risk. In other words, JGP take an outright position in the market short in this case and the trade houses are therefore long futures and short spot, and they have to finance the month gap.
Trade houses borrow material on a rolling basis to meet the short obligations, until the contract expires, and the trade houses receive platinum from the public. All very simple, but the net outcome is heavy borrowing of platinum when the JGP are short, and conversely lending when the JGP are long.
Platinum lease rates are, unsurprisingly, volatile.
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