Gyroscopic Investing

Allow me this naive question: Of course gold pays no dividends. But why not? Instead of paying the bank to store coins in a safe deposit box, why can't we lend this wealth to the bank the way we lend out out our cash savings deposits? Can't the bank take note that they have such and such a number of coins from us, coins of this pseudocurrency, and invest on our behalf?

Or, would this ruin gold's special characteristics in the world of finance?

dualstow wrote:But why not? Instead of paying the bank to store coins in a safe deposit box, why can't we lend this wealth to the bank

Isn't this what GLD does?  Doesn't this impart counter-party risk?

I was thinking about GLD as I typed the question, but I was wondering if it makes a difference if you begin with your own physical coins rather than depending upon a company's promise.

Perhaps it doesn't make a difference to whoever is doing the borrowing.

dualstow wrote: Allow me this naive question: Of course gold pays no dividends. But why not? Instead of paying the bank to store coins in a safe deposit box, why can't we lend this wealth to the bank the way we lend out out our cash savings deposits? Can't the bank take note that they have such and such a number of coins from us, coins of this pseudocurrency, and invest on our behalf?

Or, would this ruin gold's special characteristics in the world of finance?

If I remember correctly, it is possible to lease out your gold. However, as you said, doing so probably defeats the purpose of holding physical gold in the first place.

All the best,

Ryan

Thanks, Ryan. Yeah, I guess you'd have to have some kind of insurance, something like FDIC. And even then, it would not be the same as merely holding gold and not loaning it out.

Lending your gold would be like lending your treasury securities and therefore defeat the purpose.


Oh wait, I do that with TLT .

dualstow wrote: Allow me this naive question: Of course gold pays no dividends. But why not? Instead of paying the bank to store coins in a safe deposit box, why can't we lend this wealth to the bank the way we lend out out our cash savings deposits? Can't the bank take note that they have such and such a number of coins from us, coins of this pseudocurrency, and invest on our behalf?

Or, would this ruin gold's special characteristics in the world of finance?

Sure, a bank could lend out your gold, but that raises two questions:
1. Who would want to borrow gold? Other than miners, who could theoretically repay in kind, and bullion banks, who don't repay at all, there aren't many possible borrowers.
2. Why would you want your gold to be lent out? That removes the "tail risk" protection that you have with physical gold.

TLT, exactly! That was definitely on my mind, even though treasuries are already so liquid.

Libertarian666 wrote: Sure, a bank could lend out your gold, but that raises two questions:
1. Who would want to borrow gold? Other than miners, who could theoretically repay in kind, and bullion banks, who don't repay at all, there aren't many possible borrowers.
2. Why would you want your gold to be lent out? That removes the "tail risk" protection that you have with physical gold.

1. I don't know, but maybe speculators. Currency speculators.
1B: Repayment: like short sellers who borrow stock to sell but who eventually buy it back, a gold borrower would eventually have to pay the lender back. I'm not sure if they would have to repay in kind or not.
2. Well *I* wouldn't. When it comes to gold, I say neither a borrower nor a lender be. But there are all kinds of entities, like credit default obligations, that exist without me. Even though I wouldn't participate, I'm just curious about it.

I'm not aware of any way for individuals to profit by leasing gold - although central banks apparently do it on a very large scale .  Here's an article about it http://goldnews.bullionvault.com/gold-leasing-060520138.

WildAboutHarry wrote:

dualstow wrote:But why not? Instead of paying the bank to store coins in a safe deposit box, why can't we lend this wealth to the bank

Isn't this what GLD does?  Doesn't this impart counter-party risk?

GLD claims they do not (at least directly) lease any of their gold.  However, since their shares are fungible with gold, the open short interest on GLD (currently about 29.3M shares) is effectively the same thing obscured by a bunch of smoke and mirrors. 

moda0306 wrote: Lending your gold would be like lending your treasury securities and therefore defeat the purpose.


Oh wait, I do that with TLT .

LOL. That's why at my next rebalance I am going to move from TLT to VGLT. TLT is a little bit closer to the ideal for LTTs and VGLT also lends out its securities. But at least with Vanguard, as a shareholder I get the benefit of this policy instead of the suits at BlackRock.

There is a borrow/lend market for gold, which operates just like cash, but with gold interest rates generally sub around 0.20% it just doesn't mean enough profit for banks to make that market available for retail investors.

Ad Orientem wrote:

moda0306 wrote: Lending your gold would be like lending your treasury securities and therefore defeat the purpose.


Oh wait, I do that with TLT .

LOL. That's why at my next rebalance I am going to move from TLT to VGLT. TLT is a little bit closer to the ideal for LTTs and VGLT also lends out its securities. But at least with Vanguard, as a shareholder I get the benefit of this policy instead of the suits at BlackRock.

Have you looked into how much of their assets they loan out and what Vanguard does with the collateral?  I don't know, but I suspect it's not 40% and that they don't re-invest the collateral in a (non-treasury backed) money market fund.  Saying TLT is like owning LTTs directly is like saying owning an oil painting from Dafen is like owning the original.

Actually, gold does pay dividends, they are just reinvested. 

I have heard intriguing rumors of an gold-based annuity. Obviously it would not pay interest, but the actuarial risk-spreading would be awesome!

Libertarian666 wrote: 1. Who would want to borrow gold? Other than miners, who could theoretically repay in kind, and bullion banks, who don't repay at all, there aren't many possible borrowers.

Short sellers might want to do that. I borrow gold, I sell it high, and buy it back low (hopefully) to pay back my golden debt (+ interests). That's the very definition of short selling. For the original owner of gold, though, there's a counterparty risk : the borrower might not be able to pay you back if gold skyrockets, i.e. when you need it most.

Another way to earn a revenue on gold is to sell call/put options. Selling put options offers you a revenue at the expense of being forced to buy gold at the current price if it drops and selling calls offers you a revenue at the expense of being forced to sell your gold at the current price if it skyrockets. The latter ruins your high inflation protection, though.

Why the op described is a bullion bank. These banks can and do lease gold out for different terms. These rates are called the gold lease rates. Kitco publishes all the U.S. rates up to a year.