It is often blithely asserted that precious metals have no interest rate. This is incorrect.

Deposits and Leases

The rationale for lending and, particularly, borrowing metal will vary between gold, silver, platinum and palladium. However, very broadly speaking, lenders of metals will be seeking a return on their investment, whereas the borrowers will have a variety of motives. These can range from miners seeking to hedge future output to industrial companies borrowing platinum and palladium that will be turned into catalytic convertors before being installed in a petrochemical plant.

Clearly, the range of motivations is far wider than those listed above, but the calculation on deposits and leases remains the same.

For example, a fibreglass manufacturer wants to borrow 2,000 ounces of platinum for a year to use the metal in the industrial process. For illustrative purposes, if it is charged an interest rate of 4% and the day count is exactly 365, then the calculation for the interest owing at maturity is simply:

((2000 x 4%)/360) x 365 = 81.111 ounces

At maturity, the loan can be rolled over (depending on credit considerations), either with the existing lender or with another bank.

The lender has full credit exposure to the borrower over the amount of the loan – the currency value of which will fluctuate as the underlying metal price increases or decreases.

However, it is unlikely that the fibreglass manufacturer will have ready access to additional platinum (save by buying it) to repay the interest and may not be willing to accept the unquantifiable risk in being effectively short platinum for a year. Therefore, the loan is likely to be converted from one where interest is payable in metal to one where it is payable in currency – on the basis that a manufacturer is more likely to have access to currency than metal – at the spot price at inception.

Using the same numbers and example, a fibreglass manufacturer wants to borrow 2,000 ounces of platinum for a year to use the metal in the industrial process. For illustrative purposes, if it is charged an interest rate of 4%, the platinum price is $1000 per ounce and the day count is exactly 365, then the calculation for the interest owing at maturity is simply:

((2000 x $1000 x 4%)/360) x 365 = $81111.11

At maturity, the loan can be rolled over (depending on credit considerations), either with the existing lender or with another bank. The lender has full credit exposure to the borrower over the amount of the loan – the currency value of which will fluctuate as the underlying metal price increases or decreases. However, the manufacturer has certainty over the amount of interest owing at maturity – obviously, this could equally be priced in euros and so on.

Manufacture of fibreglass