Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

GOFO and Gold Prices

Commodities / Gold and Silver 2016 May 20, 2016 - 02:51 PM GMT

By: Arkadiusz_Sieron

Commodities

The Gold Forward Offered Rate (GOFO) is the swap rate for a gold-to-U.S. dollar exchange. In other words, it is a rate at which someone is ready to lend gold on a swap basis against greenbacks (the benchmark used to be quoted by a few banks involved in the rate-setting process which were prepared to lend gold to each other). For example, if someone owns gold and wants to borrow U.S. dollars, he can use gold as collateral to secure the loan. The GOFO is the interest rate on that loan. Since gold is an excellent collateral (it’s portable and liquid), the GOFO rates used to be relatively small. Actually, certain rates were sometimes negative in what signaled high physical demand.


The GOFO started to be quoted in 1989 to increase transparency in the market for borrowing gold. For decades, the LBMA has published GOFOs for one, two, three, six and twelve months each business day at 11.00 a.m. (GMT), serving as an international benchmark and the basis for the pricing of gold swaps, forwards and leases. Unfortunately, the GOFO was discontinued effectively since January 30th, 2015, as Deutsche Bank and Société Générale decided to leave the GOFO rate-setting process in October 2014. It does not mean that there are no longer swaps of gold against the U.S. dollars, but that the gold forward rate benchmark no longer exists (the GOFOs are now quoted individually and are available only to bank customers). Although the GOFO is no longer published, it is still worth understanding, because if we truly grasp the GOFO, we will also understand gold swaps, forwards and leases – the building blocks of the gold wholesale market.

Indeed, the GOFO resembles the gold forward rate and may be interpreted as the difference between the U.S. dollar interest rate (LIBOR) and the gold lease rate (GLR). In our example a central bank lends gold on swap against U.S. dollars – it essentially sells gold spot and buys gold forward. It is a forward swap that simulates lending (a gold loan collateralized with greenbacks). Let’s assume that the central bank owns gold that it wants to put up as collateral for a one year dollar loan, so it agrees with its dealer on a swap transaction. We can break down this transaction: dealer gives dollars to the central bank which invests them (receiving LIBOR) and borrows gold (paying GLR) to give it to the dealer. Therefore, the GOFO may be considered as the difference between the interest rate that could be earned on dollars (typically LIBOR) and the interest rate that could be earned on gold (GLR) – actually, it should not surprise us that the rate on a swap is the difference in the interest rates between the two assets being swapped.

Usually, the GOFO is positive, i.e. the interest on the dollar-denominated loans is higher than the GLR. In other words, if we lend gold and borrow greenbacks, we have to pay interest, since gold serves only as the collateral for borrowing U.S. dollars at a lower interest rate than one would have to pay for an unsecured loan. Because the GOFO resembles the gold forward rate, the price of gold for delivery in the future is usually higher than the spot price, i.e. there is contango in the gold market. However, sometimes the GOFO turns negative which implies backwardation in the gold forward price. Negative GOFO means that the urge to borrow gold is greater than the urge to borrow dollars, since the institutions are willing to pay interest to borrow gold against the U.S. dollars as collateral (in other words, gold is perceived as more valuable as something to hold than dollars are). Negative GOFO used to be a very rare phenomenon with a shortage of metal liquidity for leasing (being a bullish signal), however since the introduction of ZIRP, GOFO has gone negative much more often and for longer periods.

Indeed, as one can see in the chart below, from 1989 to the 2010s, GOFO turned negative only a few times for a very short period, sometimes along with the bottom of gold price. For example, in early 2001, the negative GOFO coincided with the bottom of the bear cycle in the gold market. Similarly, in 2008, the negative GOFO (resulting from the flight to gold as a safe-haven) appeared almost exactly at the bottom of the 2008 gold correction. However, in the current zero interest rate environment, the negative GOFO is no longer a reliable bullish indicator.

Chart 1: The price of gold (yellow line, right axis, London P.M Fix), 1-month GOFO (red line, left axis, in %) and 12-months GOFO (orange line, left axis, in %) from July 1989 to January 2015.

Summing up, the GOFO is the swap rate for a gold-to-U.S. dollar exchange, making it one of the most important gold market-related interest rates. In February 2015, the London Bullion Market Association stopped publishing the benchmark for the GOFO, which decreased transparency in the gold market. However, the GOFO still contributes to better understanding of the wholesale gold market. Resembling the gold forward rate, the GOFO links to the GLD and may be used to assess whether the gold market is in contango or backwardation. In the past, negative GOFO tended to precede rallies in the gold price, but the ZIRP reduced its role as a bullish indicator.

If you enjoyed the above analysis and would you like to know more about the gold lending and swap market, we invite you to read the May Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

If you enjoyed the above analysis and would you like to know more about the structure of the gold market, we invite you to read the March Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules