So why wasn’t Gibson’s Paradox working any more? That is, with real interest rates declining, what was holding down the gold price? There were no announcements of new Central Bank selling, yet the market was acting as if gold was appearing out of thin air to meet the increased demand naturally resulting from the low real interest rates.

Howe and Landis deduced, after finding some clues in obscure Central Bank gold statistics and a few things said in the public record, that the source had to be the Central Banks, but this time covertly, out the back door, rather than openly out the front door. It was their theory that the source of the supply was a new gimmick: gold leasing.

Instead of selling gold outright, the Central Banks were leasing it, quietly and privately, to international investment Banks such as Goldman, Sachs. An investment bank would pay what is called the “lease rate” on the gold. (To call it an “interest rate” would be an admission that gold is money). The “lease rate” for gold was extremely low. The investment bank/lessee would then sell the gold on the open market and invest the sales proceeds in some instrument paying well in excess of the lease rate. They pocketed the difference between the lease rate and the rate of return on the sales proceeds.

But here’s the part that stinks: in the opaque accounting of Central Banks the leased gold was still accounted for as an asset and was carried on their books as if it were still in the vault. Therefore, the amount of gold they CLAIM they owned had stayed the same. The difference, however, is that some of it was now hanging around the necks of Indian brides.

The investment bank/lessees owed the Central Banks the borrowed gold, but the gold had long since disappeared into the physical market. So the investment banks now had a “short position” in gold. They had sold something that they didn’t own and which they were legally obligated at some point to lay their hands on and return to the Central Banks.

This scam had three results. First, the gold price was suppressed. Second, the Central Banks, through the gimmick of leasing, no longer had control of as much physical gold as they showed on their books. Third, a group of investment banks owed the Central Banks a lot of gold that they didn’t have. In the next post I will discuss the implications of all this.

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