Is Australia On A 5.55% Gold Standard?

The Reserve Bank of Australia (RBA) recently came under criticism in The Mystery Of The Missing Australian Gold regarding its gold leasing activities (see my initial response to John and Martin). Drilling into the RBA's annual reports I came across some curious relationships between Australia's gold reserves and its money supply. Before I get to that, there is some additional detail I missed in respect of the RBA's gold management and John and Martin's comment that the 0.15% earned on our gold was non-commercial. To recap, the chart below shows the historical gold lease rates (blue line) the RBA has achieved.

 

To put that rate in perspective, Nick Laird from Gold Charts 'R' Us helps out with this derived lease rate chart, which provides more recent figures than the chart in my previous post. For those interested in historical context, the London Bullion Market Association provides public charts of derived (ie LIBOR - GOFO) gold lease rates here from 1990 to 2015 (GOFO benchmarks ceased in 2015). Note: current actual lease rates are only available on paid subscription sites with some derived data being produced by Monetary Metals for free if you sign up.

 

The purple arrow indicate the time period related to the RBA annual report where the 0.15% figure was reported. To confirm whether 0.15% is reasonable, we need to know for what durations the gold was leased. While the RBA ceased reporting on the credit limit breakdown of its leases (as I reported on here), they still provide a duration breakdown, see the chart below.

 

The RBA reported average balance was 4 tonnes in less than 3 months and 5.1 tonnes between 3 to 12 months. That works out about 5 months average duration, which is closest to the 6 month green line in Nick's chart. In that case, the 0.15% looks like a fair result from the RBA compared to market rates. Having said that, the 0.15%, in my opinion, is too low notwithstanding the RBA is lending on a collateralised basis or to entities with "government support". The red line on the first chart shows that the RBA was pretty much lending out all of Australia's gold reserves prior to 2005 but sharply pulled out of the market as its longer term (1-5yr duration) leases matured into a market where lease rates were sub 0.40%. It clearly didn't think the risk/return tradeoff was right at the time and that was prescient considering the GFC hit in 2008. If the RBA is willing to increase its gold leases at 0.15% it must now consider everything has been fixed and financial risks are low - a position many would think is questionable.

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Susan Miller 3 years ago Member's comment

Wow, this is a mystery... and one I wasn't even aware of!