Gold Lease Rates and Forwards
How central banks and bullion dealers earn interest by lending out physical gold, and how that lease rate links directly to the price of a gold forward contract.
Gold sitting in a vault earns nothing on its own, so central banks and large holders often lease it to bullion banks in exchange for interest — the gold lease rate. A dealer who borrows gold can sell it, invest the cash at the ordinary interest rate, and return the gold (or its value) later, pocketing the difference between what the cash earns and what the lease costs. This chain of transactions is exactly what determines the fair price of a gold forward contract.
The relationship is simple: the forward price should equal the spot price adjusted for the interest rate you'd earn on cash, minus the lease rate you could have earned instead by leasing the gold. When gold is in very high demand for leasing (say, because of physical shortages), the lease rate rises and gold forwards can trade lower than a naive cash-and-carry calculation would suggest — this is sometimes described through GOFO, the gold forward offered rate, which is the cash rate minus the lease rate.
Worked example. Spot gold is $2,000/oz, the 1-year cash interest rate is 5%, and the gold lease rate is 1%. The 1-year forward price roughly reflects the 4% net cost of carry: 2000 \times 1.04 = \2,080, meaning a forward far below \2,080 signals unusually strong demand to lease physical gold.
The gold lease rate is the interest earned by lending physical gold, and it directly reduces the effective cost of carrying gold forward — a rising lease rate compresses the forward price relative to spot because leasing becomes a more attractive alternative to holding cash.
Further reading
- LBMA, Gold Forward Offered Rate (GOFO) historical methodology