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Glossary Term: GOLD CARRY TRADE

Definition(s) for GOLD CARRY TRADE:


1. ) refers to a carry trade where one borrows and pays interest in order to buy something else that has higher interest. The gold carry trade works as follows.A central bank loans a bank (sometimes called a bullion bank) some gold. The gold lease rate is generally very low. The bullion bank immediately sells the gold and invests in securities with a higher rate of return, such as government long-term bonds. The carry return is the return on the bonds minus the gold lease rate. However, this trade is risky on two dimensions. First, if the bullion bank invested in long-term bonds and the interest rate goes up, the trade could be unprofitable. Furthermore, the bullion bank has effectively sold the gold short. If the loan is called by the Central bank and if gold has risen in value, the bullion bank will have to go into the market and purchase higher priced gold. Indeed, if many banks are short, the unwinding of the gold carry trade could drive the gold price even higher.



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