Today (April 3, 2014) the one month Gold Forward Offered Rate (GOFO) turned negative again. This is the seventh time since July 8, 2013 this has happened. I would like to share a few thoughts on this.
A few weeks ago when I wanted to see and download GOFO rates these were easily accessible on the LBMA website. This site, however, recently suffered a makeover. A few days ago I couldn’t find the GOFO rates at all, then when I did find them I noted they weren’t allowed to copy! I directly emailed the LBMA about it, this was their response:
The LBMA do not own the gold and silver prices, we publish the prices on our website under an agreement with the London Gold and Silver Fixing companies, who own the data and who are responsible for setting the gold and silver prices on a daily basis. When we launched the new website, this was on condition that we prevented the data from being downloaded or scraped from the site. If you would like to be able to download the data you will require a licence from the Gold and Silver Fixing Companies.
Nice one, no more GOFO data for the average Joe to analyse. I immediately requested a license at the London Gold and Silver Fixing companies to be able to download the GOFO rates. In the meantime I spent a couple of hours manually writing the rates one by one in my excel sheet from the new LBMA website.
The LBMA also changed the order of the rates; the last date is now at the top. Just to make things a little easier.
What Is GOFO?
I will just skim the surface here, I will write about GOFO in detail in coming posts. First lets have a look at some equations and what factors determine GOFO to help us understand what GOFO is.
LIBOR (USD loan) – GLR (Gold Lease Rate, XAU loan) = GOFO
LIBOR – GOFO = GLR
LIBOR is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It’s a benchmark for fiat money interest rates all over the world. Many consumer interest rates like mortgages and credit card loans are derived from LIBOR.
The gold lease rate (GLR) is the interest rate on gold. If a central bank chooses to lend (lease) some of its gold reserves, it agrees on an interest rate with the borrower. For example, the US Treasury, which is the owner of the gold on the Fed’s balance sheet, decides to lend 3 metric tonnes for 1 year to a jeweller against a 2 % interest rate. A year later the jeweller has to repay the US Treasury 3,06 metric tonnes. In this transaction paper gold would be created out of thin air, as at the start of the lease the gold would be physically transported to the jeweller but would remain on the Treasury’s balance sheet as gold receivable (assuming the Treasury would disclose the distinction between gold and gold receivables). Double counting the same gold creates gold. When the gold loan is payed back by the jeweller the created gold vanishes. Just as in fractional reserve banking at commercial banks.
Gold loans exist in various forms, they can also be done through a book entry at a bullion bank without physically moving gold. The GLR is determined by supply (gold lenders) and demand (gold borrowers) in the gold market.
The Consequences Of Negative GOFO
From looking at the equations we can conclude GOFO is the difference in interest rate between US dollars (USD) and gold (XAU). When the three months GOFO is negative, it means the interest rate to borrow XAU for three months is higher than the interest rate to borrow USD for three months; there is more demand for XAU than USD. This suggests the value of gold expressed in dollars will rise.
Bear in mind we live in a ZIRP bubble bath, there is such USD supply (out of thin air) that LIBOR is exorbitant low.
Nevertheless in the following chart we can see that when GOFO is trending down the price of gold (XAUUSD) is pushed up.
In the above chart I made the negative GOFO periods grey. The gold price (right axis) tends to go up in these periods. If GOFO persists to trend lower it’s very likely the price of gold will rise. When we look back a couple of years, we can see that every time GOFO dipped in negative territory a strong bull market in gold followed. I expect to see the same in coming years.
Deutsche bank that recently announced to stop participating in the London gold fix (and is one of the banks under investigation of manipulating the London gold fix) wrote this on GOFO, from their Quarterly Commodities Report April 2013:
Historically, GOFO rates have only been negative twice since 1999, but have frequently moved into negative territory over the past year. We believe this is a result of on going large shift of gold from the west to the east. More recently, with GOFO turning positive, it suggests that physical tightness has eased at least in the near term.
Well guess what, GOFO is back negative again and the west to east gold exodus is long from over.