“While most retail investors generally cannot generate income from holding gold, Central Banks can instead actively manage their assets for profit,” said Bart Melek, head of commodities at TD Securities.
Central banks can either lend their gold reserves for interest income or swap the precious metal for US dollars in a swap deal, Melek concluded. Market conditions are now favoring consistently high positive gold leasing rates, Melek said.
"The reversal of extremely dovish monetary conditions, with the Fed and other monetary authorities embarking on aggressive tightening, suggests that the environment is ripe for higher lease rates," he said. “In addition to monetary policy, selling and buying by central banks, as well as hedging activities, also drive up gold leasing rates.”
TD Securities also expects lower gold prices going forward, which will benefit gold yields as bear markets in gold increase hedging activity. The bear market for gold is encouraging miners to hedge with investment banks, creating an environment in which gold lease rates are likely to be high and volatile. The weakness in the economy and commodity markets also means that many Central Banks are forced to draw on their dollar reserves more than during boom times, suggesting that gold purchases may slow down. This should also help boost gold yields through 2023,” Melek added.