GOFO and Gold Prices

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 Socit Gnrale 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.

This post was published at GoldSeek on 20 May 2016.