I think I've confused everyone here, including myself.
I've now finally got to grips with the lease rate issue, and I was right the first time!
Lease rates are to some extent artificial. The market determines the 'forward rate'. So what is the forward rate? The FO is the rate of interest that a bullion bank will pay you, if you wish to borrow gold, putting up USD as security. Essentially, you want metal temporarily, but want to hedge the price: e.g. you're a investor looking to 'short' gold, or you're a goldsmith, looking for some gold to practice with, etc.
As a result, the forward rate combines both features of the gold market, and the USD credit market. If you then subtract out the LIBOR rate, which represents the credit market, you get the 'lease rate' which represents the theoretical cost of a 'naked' gold loan - i.e. a loan without collateral, which would not normally be made.
So, just making up some easy numbers, if the USD LIBOR rate is 3%, and the gold lease rate is 1% and gold is $1000/oz - I could borrow a 100 oz bar, by putting up $100k collateral. The bank would pay me 3% on the $, and charge 1% on the gold - The bank then pays me the net (2%) which is the forward rate - I get the gold, and the bank pays me $5 a day for swapping it for greenbacks.
In cases of a short term gold shortage, the lease rate will rise, representing the fact that it is difficult to find gold to borrow and you have to pay a premium for it. E.g. If lease rate rises to 10%, then I deposit $100k and take the 100 oz bar, but I actually have to pay interest on the gold at 7% per year. In this scenario, the gold is more highly valued than the $, so although I get the gold, the bank will require an extra $20 per day in interest. This high lease rate encourages large holders of gold to lend it, thereby freeing up the short term market: everyone is happy - the lender makes money on lending the gold, and the shorts make money because they sell the gold at its peak, and buy back after the short term crisis is over.
What does a negative lease rate mean? It means that the forward rate is higher than LIBOR. In other words, swap US$ for gold, they will pay a higher rate of interest for the US$ than the market rate. Essentially, they are desperate to lend the gold out (or receive USD) even if they have to pay a premium for it.
Why has the lease rate gone negative? I suppose, as lease rates rise in short term shortages, lease rates will fall if the short term market is flooded out. However, the actual gold market is different to the gold borrowing market. So, presumably, this move indicates a sudden move to encourage shorting of gold. POssible options:
1) Something has scared the shorts off, and they have been panic covering. The bullion banks are now getting their gold back and will have to return USD, and they are trying to stem the flow - either they don't want the gold back so quick (unlikely), or they're struggling to get the USD together (more likely).
2) There is a massive glut of gold on the spot market. The recent rise in price may have encouraged hoarders and hedged producers to start emptying stockpiles.
3) Possible asymmetric manipulation of the LIBOR rates. E.g. The FED's new liquidity injections have helped lower LIBOR, but not all institutions may be eligible for them. If bullion banks can't get hold of the USD liquidity then they may be forced to pay a higher USD rate in order to improve their balance sheets.