When short term gold lease rate turned negative in the second part of 2011 (Chart 1), we started to see price manipulation in the gold market. Each time the gold lease rate started to spike downwards, we saw a big decline in the gold (GLD) (PHYS) and silver (SLV) (PSLV) price afterwards. Low gold lease rates mean that lenders want to lend out their gold at all costs. High gold lease rates mean just the opposite, investors will have to find more profitable investments to put that leased gold into use.
The reason why gold prices went down is partially to be found in central banks leasing gold to banks like J.P. Morgan (JPM) and HSBC (HBC), who then lend it to the consumers to sell their gold for dollars to increase liquidity. Eric Sprott (on the Ellis Martin Report) and Mike Maloney (on RT News) recently brought these manipulative schemes to my attention. (Other reasons for the decline of the gold price are found in several margin requirement hikes at the CME during year 2011.)
When gold lease rates went negative, it meant that central banks would actually pay bullion banks to borrow their gold and sell it on the open market. To put it simply, the central banks are paying J.P. Morgan and HSBC to take on the risk of shorting gold. All of this was to ensure that the gold price would stop rising because gold is a reciprocal barometer to the health of the economy. I emphasize the words "Risk to short gold." If shorting gold were highly profitable (which it is not), central banks wouldn't pay the bullion banks to do it. This artificial suppression of the gold price cannot last. As a result, we saw some cracks starting to emerge in this manipulative scheme.
Lately, the trend in gold lease rates have been going upwards since year 2012. This trend indicates that the use of gold as a source of liquidity is subsiding. At these higher lease rates, it will therefore be more difficult for bullion banks to manipulate the price of gold downwards. It is a fact that bullion banks will have to return this borrowed gold to the central banks at some point. This event will spark a rally in the precious metals and consequently push up the gold lease rates as we are starting to see now. Next on, gold prices will be propelled upwards as this scenario unfolds.
Historically, the 3 month gold lease rate was at 1%. Today the 3 month gold lease rate stands at 0.05% (Chart 2). The primary reason why rates are so low now is because of the Washington Agreement in 1999: "Gold should remain an important element of global monetary reserves and to limit their sales to no more than 400 tonnes (12.9 million oz) annually over the five years September 1999 to September 2004."
Although the Washington Agreement has been renewed several times up till today, short term lease rates for gold are still at a historical low and should be going up in the future.