Gold prices have hit new records this year, and wealthy investors and family office executives are no longer content to keep their gold bars sitting in their vaults. They lease bullion to refiners, jewelers and processors for interest, contradicting gold’s reputation as a non-yielding asset. “I’ve been getting a lot of calls saying I’ve got $2 million worth of gold bars, I’ve got $1 million worth of gold bars, can I lend it to you?” said Gaurav Mathur, founder of SafeGold. “What’s really changed in recent months is that a lot of our affluent customers have become comfortable with leasing,” he told CNBC, adding that SafeGold’s lease value has increased from $2 million to $40 million since the beginning of the year. People are no longer just buying gold and waiting for the price to rise to $5,000. They want to hold it no matter the price, but then the question immediately comes to mind: how can they take advantage of it? Keith Weiner, founder and CEO of Monetary Metals, said in an interview with CNBC that the appeal is intuitive: Investors who already plan to hold gold can earn the yield paid in gold through lease payments, while jewelers and manufacturers use those lease payments to finance the gold they need for day-to-day production. These borrowers repay the same amount of gold rather than dollar amounts, thus avoiding the effects of price fluctuations while keeping inventory on hand. SafeGold currently offers a 2% yield on secured leases and 4% yield on unsecured leases. Interest rates rose to 3% and 5% at the beginning of the year. “People are no longer just buying gold, they’re waiting for gold to go up to $5,000,” said Keith Weiner, founder and CEO of Arizona-based Monetary Metals, which arranges gold leases between investors and industrial users around the world. “They want to hold it regardless of the price, and immediately the question becomes, how do we leverage it?” Mr. Joseph, a US entrepreneur who declined to give his last name, said he had doubled the amount of gold he leased through Monetary Metals in the past year as the price of gold soared. “The only sure bet I know is that the currency will depreciate,” Joseph said. Mr. Joseph earns about 3.8% in gold. “Central banks are accumulating gold at an extraordinary pace. We live in a world where global debt is unprecedented. Accumulating gold is the easiest and stress-free decision one can make,” he said. How it works Gold leases work similarly to loans, except the asset is in ounces rather than cash. The structure is slightly different, but the basic logic is the same. Investors supply gold to leasing platforms or financiers, who then lend the metal to companies. Jewelers, smelters, and manufacturers who need gold to make jewelry or components don’t need to borrow cash or risk price fluctuations while holding gold. The finished product can then be sold at the current gold price. The lessee then pays a lease fee, which is a type of interest on the gold, and either returns the same amount of metal at the end of the term or accelerates the lease term. The appeal for borrowers lies in the simplicity and clarity of accounting. “Gold leasing solves two problems,” said Wade Brennan, CEO of Kilo Capital. “This gives you the funds you need and eliminates price risk. If you buy gold with a bank loan, you have to hedge or you are exposed to the gold price. Most businessmen are not familiar with futures.” Lending gold involves counterparty risk. In other words, it is the risk that the borrower may not be able to repay the loan. World Gold Council John Reade When the time comes to return the gold, the borrower buys back the same amount of bullion at the current price. Therefore, even if gold were to rise in value, both the selling price and the repayment cost would rise in tandem. “If you lease gold to begin with… you never have to worry about whether the price of gold goes up or down,” Brennan said. Customers include jewelers, wholesalers, bullion dealers, and technology companies that use gold in sputtering targets used to coat high-purity components such as semiconductors and specialty connectors. Gold prices are up more than 50% so far this year, maintaining their biggest annual upward trajectory since 1979, after retreating from last month’s all-time high of over $4,381.21, LSEG data showed. Record prices have increased the dollar value of every bar, increasing the demand for capital throughout the supply chain. Goldstrom CEO Patrick Tuohy said demand for gold leases among jewelery customers had doubled in the past four months. “Gold prices have increased significantly over the past year, so the same $100,000 bank loan can buy significantly less gold. Jewelers need alternative financing, and gold and gold leasing solves that,” said a Singapore-based precious metals trader who leases for international clients from Dubai to Ghana. Gold leasing is not a new phenomenon, with large institutional investors such as central banks and large bullion banks being traditional strongholds in this space. But what has changed recently is that wealthy individual investors are now participating through leasing platforms, Toohey said. Risks? However, leasing gold involves counterparty and operational risks that are not present in regular storage. “Lending gold, whether it’s a lease or a swap, involves counterparty risk. In other words, there’s a risk that the borrower may not repay,” said John Reid of the World Gold Council. While the interest rates that can be achieved by lending money to these companies may seem attractive, gold holders need to tread with extreme caution, considering the creditworthiness and reliability of their borrowers, Reid said. The biggest risk for metal lenders is straightforward: default. Although rare, if the borrower runs into trouble or mismanages his cash flow, he may not return his gold bars on time. Alternatively, you can return “fake” gold bars, or gold that does not have the same purity as what was claimed or leased in the first place. SafeGold’s Mathur acknowledged these concerns and said the company tests all returned gold bars for authenticity. Similarly, Monetary Metals’ Weiner said his company’s platform uses insurance, auditing, cameras and radio frequency identification technology to limit theft and fraud, but cautioned that it is “far from zero” when it comes to eliminating risk. Goldstrom’s Toohey said his company’s RFID tag system attaches wireless chips to all jewelry made from metal leased from investors. These tags send live inventory data to Goldstrom’s platform. “We literally turned a jewelry store into a safe,” Toohey said. Cameras and sensors track movements 24/7, and insurance companies underwrite the risk of theft and employee fraud. If the jeweler defaults, Goldstrom can legally seize the jewelry and melt it down to recover the gold, so there is little loss. “This model has been operating in the Middle East since 2006 and there has never been a default,” Toohey said.
