this article explains some of the mechanics of how and why gold leasing is done. the information on leasing rates rising indicates how the scheme may be undone. the demand for physical gold is causing that market to decouple for the market for paper gold. and the situation with silver is much, much worse.

"Central banks hold a lot of physical gold and it just sits there earning nothing. As we know, central banks have been pumping money into the markets for 13 months now; what has not been reported is that they have also made their holdings of gold available for lease for about 0.25% for a month.

A short seller in gold can sell spot and lease the gold from the central banks at a nominal interest rate of 0.25%. If you sell gold, you receive USD; the cost of borrowing USD is therefore 0.25% (the gold lease rate) - so as long as gold doesn’t go up it is a cheap source of funding.

The central banks don’t mind this, especially when they want the USD up and as a rule they always want gold to fall. A falling gold price is a sign that everything is ok.

However, as you can imagine this is a time bomb because they are leasing physical gold to a paper gold market. At some point in time paper gold will not trade the same way as physical gold.

The demand for physical gold is the highest it has been for years, and this is the problem. Without the paper gold carry trade, you could argue that gold would be a few thousand dollars higher right now.

All is not well in the paper gold market. And this is a sign of an impending big rally in gold.

Lease rates have been skyrocketing over the past month. For the past six years, the 1 Month Gold Forward Lease Rate has chopped about at levels below 0.25 percent. Higher volatility over the past year has seen the rate move as high as 0.5 percent, but only in recent weeks have we seen rates greater than 2.5 percent "

http://seekingalpha.com/article/9949...