The Dollar and Gold

One theme that has captured the imagination of many investors has been the debasement of paper money and the dramatic rise in gold prices. Gold has risen 27.6% in dollar terms thus far this year (24% in euro terms, which reflects 3% euro appreciation net-net against the dollar). However, the funding pressures in Europe seems to be reversing this relationship.

Investors have been tracking the changing preferences of US money markets, which is divested or cut the tenor of European bank paper. Banks have seen the basis swap--the cost of swapping from euros to dollars--rise sharply. This week two banks borrowed dollars from the ECB's facility. There are a number of other ways the dollar funding pressure can be documented.

The press reports that one way banks have been trying to raise dollars is through leasing gold. The gold lease rate is in essence the cost of shorting gold. The FT reports today that the 1-month lease rate fell to a record of almost -0.5%. This is thought to reflect two forces--supply and demand. On the supply side there interesting in shorting gold to raise dollars is apparently strong. On the demand side, the bullion banks are reportedly reluctantly to take gold for dollars.

This is the opposite of what happened in the aftermath of Lehman's demise, when, where lease rates spiked higher. Lease rates have been consistently negative for some time, but the erosion recently has been more pronounced.

The counter-intuitive take-away is that it is cheaper to borrow gold than dollars. This does not seem to be a reflection of the intrinsic value of either one, but rather another expression of the stress of the banking system and the pressure to secure dollar funding.

Ironically, the Wall Street Journal reports that today a new tenant in Trump's building in the Financial District in NY will pay the security deposit for its lease (~$175k) with 3 32-ounce bars of gold.