Gold "Leasing" - The Central Banks' Contribution

Our intrepid bullion dealer goes out and "borrows" the Gold. Where does he borrow it from? That's easy. From the formidable 36,000 Tonne hoard still owned by the world's Central Banks.
To get the Gold - or more accurately, to get a marketable claim to the Gold - our bullion dealer pays what is known as the Gold lease rate (an extremely low rate of interest). He then sells the Gold - or the claims to Gold, and invests the money. This is the way the difference between the spot and forward prices for Gold is determined. The forward price is the money interest rate which our bullion dealer receives for his investment minus the lease rate which he paid to borrow the Gold.

The point is that this entire fandango (that's "fandango" - not "contango") can be performed by lending physical Gold, or it can be performed by lending a paper claim to Gold. The miners' Gold is still in the ground. The Central Bank sometimes lends Gold, or it lends a claim to Gold. These are what our bullion dealer sells. And since most demand for Gold is not a demand for the physical metal but a demand for paper (forward, future, etc) claims to the metal, this mechanism can meet the demand without an undue strain upon the available supply of the physical metal, and the upward pressure on the price of Gold that would cause