Gold Lease Rate Slides as European Banks Seek Dollar Funding

The interest rate for lending gold in exchange for dollars plunged to the lowest on record this week as European banks sought ways to secure the U.S. currency amid the region’s debt crisis.

The one-month lease rate on gold fell to minus 0.57 percent on Dec. 6, the lowest according to Bloomberg data going back to January 1998. The rate, derived by subtracting the gold forward offered rate from the London Interbank Offered Rate, was at minus 0.56 percent today and compares with minus 0.23 percent at the start of this year. A negative reading means banks have to pay to have their gold deposits lent.

The rate at which London-based banks say they can borrow for three months in dollars rose to the highest level in almost 2 1/2 years yesterday, even after the Federal Reserve and five other central banks agreed on Nov. 30 to cut the cost of providing dollar funding. Gold has climbed 21 percent in London this year and reached a record $1,921.15 an ounce on Sept. 6 as investors and central banks boosted holdings to protect wealth.

“European banks especially are having liquidity funding problems, which does see a lot of lending of gold and that’s putting downward pressure on lease rates,” Walter de Wet, head of commodities research at Standard Bank Plc in London, said today by phone. “Funding problems will continue for a while.”

The European Central Bank today cut interest rates by a quarter percentage point to 1 percent, matching a record low, in a bid to avoid a recession. It pledged for the first time to offer banks unlimited cash for three years and loosened the collateral rules it imposes when lending to financial institutions.

European Leaders Meet

European leaders meet in Brussels today to devise a fifth “comprehensive” solution in 19 months for a crisis that’s left Germany and France facing the threat of losing their AAA rating from Standard & Poor’s.

The Libor for three-month dollar loans climbed to 0.54 percent yesterday, the highest level since July 6, 2009, and was unchanged today, data from the British Bankers’ Association show. The dollar Libor-OIS spread, a measure of bank reluctance to lend to one another, was at 44.8 basis points, unchanged from yesterday, when it reached the highest level since May 2009.

The one-month lease rate for the metal hasn’t been above zero since May, and was as high as 2.7 percent in October 2008 and 9.9 percent in September 1999, the data show. It dropped in the final quarter in seven of the previous eight years.

Gold Bull Market

“It is quite typical of this time of year that banks look to offload metal in an effort to reduce their balance sheet,” Edel Tully, an analyst at UBS AG in London, said today by phone. “Clearly, there’s the added ingredient this year that certainly some of it is related to funding. I wouldn’t expect that it’s going to blow out considerably more from where we currently are.”

Bullion is in the 11th year of a bull market as investors sought to diversify away from equities and some currencies. The Standard & Poor’s GSCI Index of 24 commodities rose 2.2 percent as the MSCI All-Country World Index of equities fell 9 percent. Treasuries returned 9.1 percent, a Bank of America Corp. index shows.

Holdings in exchange-traded products backed by gold reached an all-time high of 2,358.2 metric tons on Dec. 6, according to data compiled by Bloomberg. That’s greater than the reserves of all but four of the world’s central banks, which are expanding holdings for the first time in a generation. The World Gold Council forecast central-bank buying for the year may reach as much as 450 tons, and UBS AG estimates purchases approaching that level next year.

“The jewelry sector borrowing practically nothing, ample physical supply out there at bullion banks, plus the liquidity crunch in Europe are all playing into it for the moment,” Jon Nadler, an analyst at Kitco Inc. in Montreal, said in an e-mail yesterday. “Gold should be what is heavily in demand at times such as these.”

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