In the early 1980s gold deposits rarely yielded over 1 percent, but in recent years have rarely yielded less than 1 percent. The chart below, from Kitco, shows gold lease rates from August 1993 to October 1996. Because of large central bank gold holdings, gold loans are one of the cheapest financing sources for the gold mining industry. A mining company borrows gold and sells it on the spot market to obtain funds for gold production. The interest installments on the gold loan are payable in gold.
Central banks are the major lenders of gold.
They accounted for around 75 percent of the gold on loan, estimated at around 2,750 tonnes, at the end of 1996. Central banks in recent years have been under pressure to earn a return on their gold holdings, and therefore lend to, for example, gold dealers who have mismatched books between gold deposits and gold loans. Let's see how this works. The gold lease rate for 180 days is 2 percent per annum. And the eurodollar rate for 180 days is 6 percent per annum.