Gold Lease Rate

The only piece of paper fixed to gold daily is the face value of gold leases. These are then sold surreptitiously into the market, with no real obligation to ever recuperate these gold sales in physical metal. However, should this price fixing mechanism fail, then the physical metal will come under heavy demand.

The mechanism that will probably undo the years of selling gold leases into the market in lieu of physical metal are actually changes to interest rates. Gold lease rates are negative, except when gold prices are in a major correction. The only other time gold lease rates can rise while the face value of bullion leases drop would be when the discount rate falls. And this is actually what has been occurring, that the discount rate has been falling ever since year 2000.

It becomes even more dire should the discount rate fall into the negative, because the pyramided junk bond derivative bubble scheme propped up on risk free gains such as those through the sale of gold leases will have begun to deflate.

The scramble for physical metal will be on.

Discount Rate

The discount rate in the U.S. is a good indicator of what's happening in the short term money market. Demand for short term paper is very high, but the Fed has so far resisted negative rates. So the supply of short term paper matches the demand, no matter how much inflation follows. What happened during the last depression when the demand for short term paper reached a crescendo, as it is now?

Rates went negative, though it was thought impossible to do so. This occurred at the end of December, 1938. So far, in the new year, rates have remained just above zero:

files.me.com/fransix/ldsgky

What Followed On Negative Rates?

It was generally referred to as a 'Black Friday' event:

http://www.stock-market-trading-tools.com/edu/Guide-To-Stock-Market-Depressions.html

With rates as low as 0.05% every December for the last two years, you may as well assume that some swaps and swap rates or repo's went negative only to rebound. Note that the stock market crash started one year after rates went negative at the end of 1938. So the Fed with its printing press has intervened in the market for about two years, by providing short term paper.

Perhaps this time the crash will precede the onset of negative rates, or simultaneously.

The 1987 Crash

http://www.guardian.co.uk/business/gallery/2007/oct/17/blackmonday?picture=331000985

http://dshort.com/articles/Kimble/101215-1987-redux.html

-F6