Gold Lease Rate (GLR)

The gold lease rate (GLR) is the cost of borrowing gold. Yes, you heard correctly. Gold may be lent and borrowed, just like any other asset or currency. Therefore, contrary to common opinions (Warrant Buffet is perhaps the most famous representative of such beliefs), gold may have a yield and may bear interest. Some entities operating in the wholesale gold market do lend gold and earn interest on such transactions. They are usually referred to as lease transactions and the interest rate applied to such lending is called the gold lease rate.

Gold lease rates used to be derived as LIBOR minus GOFO. For example, if the former is 5 percent, while the latter is 1 percent, GLR amounts to 4 percent. Since the end of January 2015, gold forward offered rates are no longer quoted by the London Bullion Market Association (LBMA), therefore it is impossible to derive gold lease rates from publicly available data. However, as a component of gold swaps, the gold lease rate remains crucial to understanding the gold lending and swap market.

The gold lease rate is usually low, but there were several spikes caused by some peculiar reasons within the gold lending market (like the announcement of the Washington Agreement on Gold). In 2009-2011, the gold lease rates were negative, which was an atypical situation in the gold market caused by the introduction of the zero interest-rate policy. As one can see in the chart below, there is no reliable link between the price of gold and the gold lease rates in the long-term.

Chart 1: The price of gold (yellow line, right axis, London P.M Fix), 1-month GLR (red line, left axis, in %) and 3-month GLR (orange line, left axis, in %) from July 1989 to January 2015.

Gold Lease Rates and Gold Price

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