TarCottage

Is it Finally Time to Sell Gold and Related Mining Stocks?

GaryD & jt - Enjoyed reading both of your comments very much.

Re-negative gold lease rate - The normal 1% gold lease rate which the Fed usually lends gold to the bullion banks has gone negative. On the surface it appears that the Fed is paying the gold bullion banks to lease gold. However one probably needs to dig a little deeper to understand what is really happening. Back in the 1990s the Fed likely leased a large amount of it's gold to the gold bullion banks (such as JP Morgan) in order to surpress the price of gold (The Great Gold Fiddle) to hide the fact that Greenspan was busy printing money and creating more credit. After leasing the gold from the Fed, the bullion banks then turned around and sold the gold for cash. With the cash the bullion banks then bought U.S. treasuries paying say 5% for a net profit of 5% - 1% = 4%.

First you need to understand that the so called gold leased by the Fed to the bullion banks has been phyically sold by the bullion banks at prices (say at $500/oz.) which are much lower than today's $900/oz. prices. That means neither the Fed or the bullion banks phyically have this gold in their vaults. Second, under current accounting rules, an IOU from the bullion banks can be counted as gold and entered on the books as gold held in the Fed's vaults. This allows the Fed's to issue accounting statements "implying" that they still phyically have the leased gold their vaults. In reality this gold left the barn a long time ago.

One can also probably assume the bullion banks are underwater on these gold lease transactions. Since these same bullion banks are likely underwater on a whole bunch of other stuff (subprime, etc.), then likely they are technically insolvent. The only thing keeping these banks solvent (probably with the Fed's blessings) is not "marking to market" the true value of their assets.

I think you can now see that the Fed has a problem. If it lets these bullion banks go under, then it would have to fess up that it no longer phyically owns all the gold that it claims to have in its vaults. That would expose the Fed's accounting lie and result in a considerable lost of confidence. The Fed probably figures it is cheaper to pay the bullion banks for leasing the gold so they can keep the game going for a while longer!

Regards, Au