Means of Gold Intervention II: Gold Lending

Abstract

Gold lending is the second instrument by which gold prices are kept low. Since the early 1980s a business has developed in the course of which a commodity – namely gold – is lent out in grand style. In so-called ‘gold-leasing’ transactions, gold that is ‘lying around uselessly’, so to speak, mainly in central bank vaults, is lent to the mines (to a smaller degree there was also lending to fabricators such as jewellers for the purpose of financing and hedging). Similar to a normal loan, the banks function as intermediaries in these transactions. These banks are called ‘bullion banks’ in the financial jargon. For the central banks, these banks reduce the risk of default of individual mines. Moreover, they take over detailed work such as choosing creditworthy mining companies. In exchange, these mediating banks receive a fee that is customary in business. The banks sell on behalf of the mines the borrowed gold in the market. Then the mines use the sales proceeds for investments – for instance, in new mining equipment. These investments in turn enable the mining companies to mine gold. This they use later to extinguish their gold debt with the central bank. The mines thus receive financing that is denominated in gold instead of in a currency. They must pay back gold, not dollars – in other words, they pay with what they produce.