Gold and silver can be lent and borrowed in the same way as currency. The rate charged for doing so is a direct measure of how scarce physical metal has become.
Metal loans serve industrial needs
A refiner, fabricator or jeweller holding a large metal inventory carries price risk on material that will only be sold weeks later as finished product.
Borrowing metal, processing it and repaying in metal removes that exposure, since the obligation and the inventory are both denominated in ounces.
Mining companies use the same mechanism in reverse, borrowing against production that has not yet been extracted.
Lenders are the holders of idle inventory
Central banks and large institutional holders own metal that would otherwise generate no return while sitting in a vault.
Lending it produces income, and the lender takes on the risk that the borrower fails to return equivalent metal at the agreed time.
The supply of lendable metal therefore depends on how willing those holders are to part with possession, which varies with their own circumstances.
The rate is derived rather than quoted
The lease rate is generally calculated as the difference between the interest rate on cash and the rate at which metal is swapped for cash over the same period.
Because it is a residual of two other rates, it can move sharply when either component shifts, and it is not always the metal market that caused the change.
Interpreting it therefore requires knowing what has moved underneath it rather than reading the headline figure in isolation.
Spikes indicate physical stress
A sudden rise in lease rates means borrowers are willing to pay materially more to obtain metal now, and lenders are not releasing enough to satisfy them.
These episodes usually coincide with backwardation in futures and with widening premiums on retail products, all describing the same underlying tightness.
They tend to resolve within weeks as refining output catches up or as high rates draw idle metal out of storage and into the lending market.
Silver behaves more violently than gold
Silver's above ground stocks are smaller relative to annual industrial consumption, so a given disruption removes a larger share of available inventory.
Its lease rates consequently spike higher and more often, and can stay elevated while gold rates remain unremarkable.
That divergence is one of the clearer signs that a tightness episode is industrial in origin rather than driven by investment demand across both metals.