Gold Lease Rates Show LIBOR's a Lousy Interest Rate Indicator

Much ado has been made about the negative gold lease rates; conspiracy theories abound, but the truth is mathematics has more to do with it than gold market manipulation.

Click to enlarge:

At the one month horizon the derived lease rate at the London Bullion Market is negative. This would imply that bullion banks are paying you to lease gold. However, this implication is grossly flawed.

The gold lease rates are a derived market rate that can be found by subtracting LIBOR from the gold forward rate (GOFO). When LIBOR drops below the GOFO rate the lease rate turns negative. The only implication that can be drawn from this is that LIBOR is a terrible indicator of current market interest rates.

Clearly, those borrowing gold and selling in the spot market are able to re-invest those proceeds at higher rates than LIBOR.

Disclosure: I am short GLD

Comments

[Izabella Ka...:]

Very similar to the point I was making yesterday (including very similar chart) here:

ftalphaville.ft.com/bl.../

Jul 16 06:51 AM

[kohalakid:]

Finally......

Someone who doesn't believe that everything associated with the gold market is a manipulation or conspiracy.

Good article.

Jul 16 09:55 AM

[reluctantQuant:]

So what rate would you use? Or is this more about throwing out the whole indicator - could see either approach...

Yes, one can invest at higher rates than LIBOR, but that's not why LIBOR was used for the indicator. LIBOR is the first step in the credit ladder of interest rates. Changing the credit component - well, that's not what the indicator is really about is it?

--rq

Jul 16 02:02 PM

[liborated.com:]

Interesting info - thanks for that. I knew that LIBOR was everywhere but I wasn't aware that gold lease rates were also pegged to it.

- MD

Jul 25 04:12 PM