Understanding Lease Rates and the Manipulation
The plain vanilla of precious-metals leasing involves central banks such as the Federal Reserve taking their gold or silver to “bullion banks.” Major firms such as JP Morgan Chase, Goldman Sachs, Bank of America, Barclays, Citigroup, , , and UBS all operate as bullion banks.
Think of the scenario where JP Morgan might pay a 1% interest rate on the gold or silver, with the promise to return it to the Federal Reserve at future specified date. JP Morgan then takes the gold and/or silver and sells it to the public, and could use the profits to buy Treasury bonds for a 3-4% net return.
But what if gold and silver rise in price and the JP Morgan has to pay more for the gold or silver it returns to the Federal Reserve than it received for the gold or silver that it borrowed? Well….. JP Morgan uses the futures market to lock in a price and delivery date of the necessary gold or silver. This cuts into their profit margins but takes all of the risk out. A 1-2% net return with zero risk is a great deal for them. As for the metal lender, a 1% return is better than the 0% return gold and silver earn in underground bank vaults. It’s a win-win for the central bank and the bullion bank—but some argue individual investors lose (read manipulation).
The lobby and critics of leasing gold and silver say that because gold and silver leasing artificially increases the supply of the precious metals, which in turn keeps the prices of the commodities down. Hence JP Morgan wants to have the prices down.
