Negative GOFO Rates Become More So

The gold forward offered rate (GOFO for short) is a swap rate for a gold-dollar swap. If one owns gold and wants to borrow dollars, one can use one’s gold as collateral for a dollar loan, and GOFO is effectively the interest rate one pays for this swap.

Implied in GOFO is the gold lease rate: one can calculate the gold lease rate (the rate at which gold can be borrowed) by deducting GOFO from LIBOR. With LIBOR close to zero on account of central bank manipulation of interest rates, a slightly negative GOFO rate often can be a mere short term wobble due to interbank rates on dollars fluctuating near the “zilch zone”. When discussing gold forward offered rates one must therefore take the level of LIBOR into account. However, in recent weeks GOFO rates have declined quite deeply into negative territory, pushing lease rates sharply higher. GOFO is now in negative territory six months out (the one year rate is at a positive 3 basis points, which isn’t a whole lot either).

This means simply put that the urge to borrow gold is currently greater than the urge to borrow dollars. Normally, GOFO tends to be positive, lease rates tend to exhibit an upward sloping yield curve and tend to be slightly lower than LIBOR (which is why small dips of GOFO into negative territory with LIBOR close to zero are not remarkable). These conditions are no longer intact though – the gold lease rate curve has a steep negative slope as a result of what has happened with GOFO recently and gold lease rates have risen far above equivalent LIBOR rates.

One, two, three and six month gold forward offered rates. Their recent steep plunge indicates that there is now a greater urge to borrow gold than to borrow dollars – a highly unusual state of affairs – click to enlarge.

Backwardation in Gold is Highly Unusual

To the extent that GOFO rates are in negative territory, there is effectively backwardation in the gold market, which should normally not occur. It indicates that there is currently a shortage of readily available physical gold supplies. According to the LBMA: