Presenting a screenshot of Monday’s London interbank gold forward rates page from Reuters:
The above are live rates, meaning what’s on the screen is what the institution in question was willing to trade at when we took the screen shot.
Before going on, we should emphasise the rates don’t necessarily reflect the position of the bullion banks in question, but rather the position of their customers — since the banks mainly act as intermediary brokers, rather than anything else.
Nevertheless, what the chart shows is very interesting.
The GOFO rate curve for many institutions is flat, or even inverted in some cases. While inversion of the GOFO curve is not exceptional, it is very rare.
The reason it’s rare is because anyone who currently has dollars can lend those dollars for a better rate on a secured basis against gold, than on a dollar Libor basis.
This either represents the fact that the Libor rate itself is an utter fantasy (or possibly only available to the best banks only) or that dollar-strapped institutions who happen to own bullion assets are using that gold to raise cash rather than going to the interbank Libor market — a fact which is creating a divergence between the two rates.
Generally speaking, the higher the GOFO rate the keener an institution is to lend that gold in the market.
What does it mean?
Simply that there is currently more gold in the market than people willing to lend US dollars.
Why is it happening today?
Possibly because it’s coming up to the end of the quarter, and there’s a rush to get gold off your balance sheet and cash in.
Related links:
The secured lending boom (through gold-tinted glasses) - FT Alphaville
The story of the gold curve, so far - FT Alphaville