Gold Forward Offered Rate (GOFO)

The Gold Forward Offered Rate (GOFO) is the swap rate for a gold-to-U.S. dollar exchange. It is not the price to lease gold but rather the price to swap gold for U.S. dollars. In other words, it is a rate at which someone is ready to exchange gold for the greenback. You can think of GOFO as the interest rate on a U.S. dollar loan secured by gold as collateral. Since a swap can be described as a series of forward contracts, the Gold Forward Offered Rate 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).

For decades, the London Bullion Market Association (LBMA) published GOFO for one, two, three, six and twelve months each business day, serving as an international benchmark and the basis for the pricing of gold swaps, forwards and leases. Unfortunately, GOFO was effectively discontinued on January 30th, 2015. It means that Gold Forward Offered Rates are now quoted individually by each dealer, and quotes are not available publicly. However, GOFO remains one of the most important gold market-related interest rates, which may be used to assess whether the gold market is in contango or backwardation.

Usually, GOFO is positive, which means that the price of gold for delivery in the future is higher than the spot price, i.e., there is contango in the gold market. However, the Gold Forward Offered Rate sometimes turns negative which implies backwardation in gold. As one can see in the chart below, in the past, a negative GOFO indicated a shortage of metal liquidity for leasing and tended to precede rallies in gold, but the zero interest rate policy reduced its role as a 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-month GOFO (orange line, left axis, in %) from July 1989 to January 2015.

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