Recently there have been a lot of what I believe to be gross misconceptions regarding the lending of gold and the absence of actual gold in various gold depositories. I'm writing this to clarify the lending process itself and the further ramifications of gold lending.
Gold has been lent to short sellers ever since I can remember, and it might go back thousands of years as well. So this is nothing new. If you hold gold lending it's a way to make extra money with very little risk. Lending gold is nothing more than selling gold for spot delivery and buying it back for forward delivery. You lend it to someone who gives you cash as collateral along with a mark to market agreement. The fee charged to the borrower of the gold which is the incentive for the lender of the gold is the below market interest rate the lender of the gold has to pay on the cash collateral he receives from the borrower. And when rates are near 0 as they are now, the lender of the gold gets the cash collateral plus an additional fee, or he doesn't do it. The fee paid to gold holders to lend their gold is a market price for that service. At some price holders of gold will take cash collateral, fully marked to market, plus a fee to lend their gold. It's voluntary. It adds to their incomes. It more than pays for their storage charges. And when the collective desire to hold actual gold and not lend it goes up, that desire is expressed in the higher fee paid to people who do lend. So if you watch that fee you can see the supply and demand for lending rising and falling.
Gold lending does perform at least one useful arbitrage function. A lot of the short sellers are gold producers. They sell for forward delivery because they have to mine it and refine it before they can deliver it. And they don't want to take the chance prices might fall, but would rather lock their profits in upfront. So if their cost of production is maybe $400/oz they might sell gold for 6 months forward or more for over $1,100 and be happy locking in that much profit, rather than waiting to sell and taking the chance prices might be lower. And if they have bank loans financing their gold operations the lender may insist they sell forward and lock in that known spread. So when buyers want their gold right away and producers won't have it ready for 6 months, what brings those people together? It's the holders of gold lending their gold in the spot market so buyers can get it right away, and then the lender getting the gold back 6 months later when the producers make their deliveries. Market forces organize this process and with the current relatively high levels of world gold production it's no surprise that lenders are very low on inventory, as only a fraction of the world's gold is available for lending.
GATA (Gold Anti-Trust Action Committee) is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be. There is some truth to the idea that lending keeps spot gold prices lower than otherwise, as it keeps the spreads between spot an forward prices 'in line' but you can just as easily say that lenders selling spot and buying forward keep the forward prices higher than otherwise, giving gold producers a better price than otherwise.
So all that gold 'missing' from depositories is in the form of cash in the depositories and contracts to buy gold in the forward markets. And with gold being produced in large quantities for untold years into the future it's hard to say for sure that there isn't enough gold coming to market over that time to satisfy the demand. In fact, market theory would say the continuously changing clearing price means there is always exactly the right amount.