Gold has been prized by man throughout history. In the past, it served as a material for the finest of ornamentations, including jewelry and even woven into fine fabrics for aristocrats and nobility. Many ancient civilizations have also used gold as a form of currency, and until recent times gold and other precious metals were used to back many world currencies.
Today gold plays a different role in the world. On a functional level, it goes beyond jewelry and ornamentation to also be used in many small electronics. Gold also weighs heavily in different investments and stock market trends.
In fact, it is even possible for you to borrow gold! Known as the gold lease rate or GLR it is possible for you to invest in it in such a way that you can gain interest on it! In this way, it’s possible for gold to have a yield which may even bear interest.
There are various entities throughout the world that operate on the wholesale gold market. From time to time they do lend gold and earn interest on these transactions. Most of the time they are referred to as basic leased transactions. The interest rate that is applied essentially defines the gold lease rate. More commonly referred to as GLR, this rate is used to derive things like LIBOR minus and Gold Forward Offered Rate.
If we take a closer look at a hypothetical example, let’s say that the former is 5%, and the latter is 1%. Then the GLR will equate to 4%. Starting at the end of January 2015, the London Bullion Market Association stopped quoting the gold forward offered rates. The LBMA essentially made it impossible to derive gold lease rates using only publicly available data. Yet the gold lease rate remains crucial for understanding the gold lending market as well as the gold swap market.
Most of the time the gold lease rate remains consistently low. However, there have been several spikes within the gold lending market. These relatively unique events were caused by things like the announcement of the Washington Agreement on Gold.
During a period of time spanning from 2009 to 2011, the gold lease rates were stuck in a negative trend. This was an atypical scenario rarely seen in the gold market. It was directly influenced by the introduction of the zero-interest-rate policy. This reveals an interesting factoid that proves there is no reliable link between the price of gold and the long-term gold lease rate.
So, it’s worth bearing in mind that the more you understand about gold, it’s price, the influencers of its price per ounce, and the influence of market trends, the more you will understand how its price is affected by gold lease rates. This investment bellwether will further help you to efficiently and successfully use gold as a profitable investment.
Gold’s Value As An Investment
Since ancient time gold served as a primary form of currency or a value backing factor for active currency in circulation. The in 1971 when the gold standard was abandoned by the United States in favor of the current fiat currency system.
This removed gold from its role in world currency and relegated it as a multi-form investment. Today gold is most often classified as a type of commodity, yet at the same time, it’s value still behaves as if it was currency.
This lustrous yellow metal is only weakly correlated with other commodities as it is less commonly used in the industry. Unlike a national currency, gold is not tied to any particular nation or financial system. In its own way, gold has transitioned into being a global monetary asset. This also means that its price is a reflection of the global sentiment. Yet it is still worth bearing in mind that it is most strongly influenced by the macroeconomic conditions of the United States.
Understanding The Gold Forward Offered Rate
The Gold Forward Offered Rate, which is also referred to as GOFO is essentially the swap rate for the gold to United States dollar exchange. At the same time, it’s important to note that the GOFO is not the price to lease gold. It is merely the price to swap physical gold for U.S. dollars, which is one of the world’s most popular fiat currencies.
This means that the GOFO is a rate at which someone is ready to exchange gold for the greenback. You can think of GOFO as being the interest rate on a U.S. Dollar loan that uses physical gold as the collateral. In a certain light, a swap can be described as a series of forward contracts, which means that the GOFO resembles the gold forward rate which can then be interpreted as the measurable difference between the interest rate of the United States Dollar and the recognized gold lease rate.
Understanding The London Interbank Offered Rate
The London Interbank Offered Rate, which is also referred to as LIBOR, is the interest rate that global financial institutions offer to lend funds between one another on the international interbank market. The LIBOR essentially measures the cost of funds to large institutions that operate in the London financial market or operate with counterparties based in London.
It is administered by the ICE Benchmark Administration which is published directly by Thomson Reuters. The LIBOR is calculated for five major fiat currencies including the United States Dollar, The Euro, The British Pound Sterling, and The Japanese Yen as well as the Swiss Franc. It is evaluated over seven borrowing periods, including the overnight, and one-week, as well as single and multiple months, up to a year. It is most commonly quoted in terms based on the three-month United States Dollar rate.
The Zero Interest-Rate Policy
The Zero Interest-Rate Policy. Which is also known as ZIRP is a special type of monetary policy that maintains short-term interest rates at zero. Late in 2007, as the global financial crisis started to affect the world economy it prompted many of the major central banks to adopt unconventional policy measures.
One of these policies was reducing the short-term interest rates to very near zero. The Federal Reserve then also slashed the federal funds rate down to nearly zero at the end of the fourth quarter of 2008. Then it maintained it near that level until December 2015. Even then the rate hike was modest and did little to affect or even normalize interest rates.