The Cost of Borrowing Gold Surges

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The cost of borrowing gold has surged to its highest level since May 2001 as central banks appear unwilling to lend bullion. The one-month lease rate for gold has soared to 2.67%, jumping more than 225% since Sept. 29 and signaling that the credit crunch has spread to precious metals markets.

The cost of borrowing gold has surged to its highest level since May 2001 as central banks appear unwilling to lend bullion. The one-month lease rate for gold has soared to 2.67%, jumping more than 225% since Sept. 29 and signaling that the credit crunch has spread to precious metals markets.

The risks posed by ongoing troubles at many banks and financial institutions means central bankers are willing to sacrifice the small return they earn on lending gold in favor safe keeping their reserves at home, said Jeffrey Nichols, managing director at American Precious Metals Advisors. “The withdrawal of central banks from the gold-lending market is contributing to gold’s high volatility.”...

Higher lease rates are typically seen in markets where people are shorting precious metals like platinum, but Mr. Norman thinks this is unlikely the case with gold right now. “You’d be pretty foolhardy to be shorting the gold market with the amount of turbulence out there at the moment, even though gold is pretty high,” he said.

More likely, it is a combination of a physical shortage of gold, along with those who hold long positions allocating it to ensure that it can be recovered if the bank that holds it fails, he added.

Regardless of the cause, experts say sharply higher lease rates are a bullish sign for gold and yet another reason that it has more room to run.

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