Bullion Leasing: The Wealthy's Gold Income Strategy

Wealthier investors and family offices are now renting out their gold bar collections to companies in exchange for interest, rather than ke...

Wealthier investors and family offices are now renting out their gold bar collections to companies in exchange for interest, rather than keeping them unused in vaults due to historically high prices.

Gaurav Mathur, the creator of SafeGold, a digital service for investing in gold, mentioned that several of the company's more affluent clients have become increasingly at ease with leasing out their assets in recent months.

So far this year, gold priceshave increased by approximately 55% despite a decline from a high of $4,381.21 per ounce recorded last month, driven by economic and political uncertainties, growing investments in exchange-traded funds, and hopes for more reductions in U.S. interest rates, as reported byReuters.

During the same time frame, SafeGold's rental revenues have increased from $2 million to $40 million, according to Mathur.

We have received numerous calls from people stating, 'I have $2 million worth of gold bars, I have a million dollars' worth of gold bars. Can you lease them for me?' he said.CNBC.

In a similar vein, Patrick Tuohy, the CEO of Goldstrom, a precious metals trading company based in Singapore, mentioned that the demand for gold leasing from his clients in the jewelry industry has increased by 100% over the past four months.

Gold and silver bars are displayed at Pallion in Marrickville, Sydney, on Friday, October 14, 2022. Image courtesy of AAPIMAGE via Reuters

Gold leasing is not a novel idea; it operates in much the same way as a loan, with investors supplying gold to a leasing platform or financier, who subsequently lends it to a company.

The borrower incurs a rental rate, which is essentially interest in gold, and by the end of the period, either returns the same amount of metal or renews the lease.

Although the market has traditionally been controlled by major entities such as central banks and bullion banks, an increasing number of affluent individuals have recently been joining the market through digital leasing platforms, as stated by Tuohy.

The attraction for investors, as per industry specialists, lies in the returns received in gold via lease payments.

For refiners, jewelers, and manufacturers, these leasing agreements provide the necessary gold for daily operations without subjecting them to price changes since they don't need to take out loans while holding the metal. They can sell their final products and purchase gold to settle the lease at prevailing market rates, meaning both their selling revenue and repayment expenses rise in line with gold prices.

However, leasing involves counterparty and operational risks, the most significant being a borrower failing to meet lease obligations or repay the loan.counterfeit gold.

To mitigate these dangers, numerous platforms have introduced strong safety protocols and frequently perform detailed background checks, collaborate with trusted jewelers, and in certain instances, insure the rented gold through a bank guarantee,NDTV reported.

At Goldstrom, Tuohy mentioned that each piece of jewelry is equipped with radio chips, and the RFID tagging system offers real-time inventory updates to the platform.

"We truly transform the jeweler's store into a secure vault," Tuohy stated, noting that cameras and sensors keep an eye on everything continuously, with insurance companies covering potential threats like theft or employee dishonesty.

In case of a default, Goldstrom has the legal right to take andmelt the accessories to recover the gold, resulting in very infrequent losses.

"This model has been in operation in the Middle East since 2006 — and there has never been a failure," Tuohy stated.

Nevertheless, even though lending gold might offer appealing returns, John Reade from the World Gold Council cautioned that investors should thoroughly assess the creditworthiness and dependability of borrowers and act with care.