> For the complete documentation index, see [llms.txt](https://docs.theo.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.theo.xyz/products/thusd/how-thusd-generates-yield.md). # How thUSD generates yield The mechanics behind thUSD's yield thUSD generates yield through a delta-neutral gold carry trade. The yield decomposes into two primary components. 1. lease income from physical gold leases 2. basis capture from the structural contango in gold futures markets ## What happens to $100 **$80 purchases physical (spot) gold.** This gold is then leased out to institutional counterparties such as fabricators, refiners, and bullion banks. **$20 is used to hedge.** This collateralizes the short futures leg that keeps the position delta-neutral. This side of the book earns carry from the spread between spot gold and gold futures. Cash held as FCM collateral sits in t-bills and earns the t-bill rate. In the combined position, 80% of the money earns lease income and contango basis capture, and 20% earns the t-bill rate. No capital sits idle. *** ## The three yield sources | Source | What it is | Amount | | ------------------ | ----------------------------------------------------------------------------- | ------ | | Gold leases | Physical gold leased to institutional borrowers, yield paid in ounces of gold | 2–5% | | Gold futures basis | Capturing spread between spot and futures | 4–5% | | T-bills | Cash margin for futures, held as t-bills | 3.5–4% | *** ## What is gold leasing? Gold trades in one of the deepest and most liquid markets in the world. Physical (spot) gold trades over the counter, with London serving as the principal clearing center. Standardized gold futures trade on regulated exchanges, principally CME Group's COMEX. In addition to spot and futures markets, an established leasing market exists in which institutions such as bullion banks, refiners, and fabricators borrow physical gold and pay a lease rate to the lender. Gold held in lendable form can therefore generate income, distinct from any change in its price. ### **Why would anyone borrow gold?** The main borrowers and their reasons: 1. **Refiners and fabricators (working inventory).** A refiner or jewelry manufacturer needs metal in the pipeline constantly — being melted, cast, or worked. Borrowing it instead of buying it means they don't tie up capital in inventory and, importantly, aren't exposed to the gold price while the metal sits in their workshop. They borrow ounces and owe back ounces, so the price risk stays with the lender. 2. **Bullion banks (market-making and arbitrage).** Dealers borrow gold to run short positions, settle client deliveries, and arbitrage gaps between spot, futures, and lease markets. They're the intermediaries that make the leasing market liquid. 3. **Miners (hedging future production).** A miner who wants to lock in today's price for gold they'll dig up next year can borrow gold now, sell it at today's spot price, and later repay the loan with their own production. The lease rate is the cost of that hedge. 4. **Financing trades.** Anyone running a trade that needs physical metal today but only wants temporary exposure — e.g., delivering into a futures contract — borrows rather than buys. The through-line: borrowers want the *metal*, not the *price exposure*. Lenders (like a gold-backed product sitting on physical) get paid the lease rate for providing it — which is exactly why "gold, leased out" is an income-producing asset rather than an inert one. *** ## What is contango? Contango describes a futures market in which contracts for later delivery trade above the current spot price. The opposite condition, in which futures trade below spot, is called backwardation.
For gold, contango is the prevailing state of the futures curve. This reflects the cost of carry: holding physical gold until a future delivery date incurs storage, insurance, and financing costs, and these costs are reflected in the price of deferred delivery. The difference between a futures price and the spot price is the basis. As a futures contract approaches expiration, its price converges toward the spot price. A position that is short a futures contract against an equivalent long position in physical gold captures this convergence as income, provided the curve remains in contango. Maintaining the position over time requires closing expiring contracts and establishing new ones at later delivery dates, a process known as rolling. The income from this activity is referred to as basis capture or roll yield. The magnitude of the basis varies with interest rates, storage costs, and market conditions. ## Can the yield scale? The market cap of spot gold is over $30 trillion USD, with gold futures being some of the most liquid markets in the world. The gold and broader precious metals financing markets have existed for hundreds of years, with annual origination volume exceeding $200 billion USD. Put simply, the markets that thUSD relies on for yield are some of the deepest and most liquid markets in the world and yield sources relying on these markets have the potential to size immensely before compression occurs.