Precious metals leasing explained

What is precious metals leasing, and why is it done...?

Leasing is an integral part of the precious metals market. Why is it necessary? For a diverse number of reasons, the first is the need for industry to borrow instead of buying outright the metal. This enables them to avoid owning the metal at a fixed price if they have not yet contracted to sell their product.

Other companies want to borrow rather than buy gold or silver, to keep their cash consumption down. Leasing gives their business greater flexibility in money management. Still others choose to borrow to free up cash. Finally, there are those in a bridge lease, commonly used in the oil refining and pharmaceutical fields.

These companies already own all the precious metal that is needed, inside their pipeline. And as that platinum, palladium, gold or silver does its job, of cleaning out impurities from their end product (petroleum, drugs or other chemicals) it simply needs to be extracted from the waste byproduct and re-introduced to the process. But leasing gives the producer a little headroom while this goes on. They don't need to own any more metal than they use, because it always comes back to them.

On the flip side there are financial, trading and metal refining companies that own gold, silver or platinum-group metals, or have metal on account, which they need to put to work. The metal that they have on account is held as a debt to their customers, rather than being physically allocated to the client. That is what enables them to turn their liability into an asset by putting it to good use, leasing gold out to earn them money.

The reason you want to know about precious metals leasing is to understand what this function represents, how it actually affects the market place, and its relationship to the price. This little exposé will in no way be exhaustive about all the different uses and functions of leasing. But it will serve as a primer for understanding a market product and service that seems to be a mystery for many commentators.

First, the pricing: Just as with anything you might pay to borrow, longer-term leases typically cost more – per annum – than short-term arrangements. See this table of indicative lease rates for instance.


Data for 4 June 2013, courtesy of Mitsui Global Precious Metals

Another very important point you should remember is that the ability to borrow gold or silver through leasing is not a simple process. In fact, most businesses involved have very stringent credit practices, and depending on the entity may entail quite lengthy processes and documentation at the front end before you can effectively become a user of this type of service. So moving forward, let's assume for practical purposes that all parties to a transaction have met the highest credit standards.

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