I appreciate and welcome the new Guidance Paper on Gold Deposit Rates which has just been released by the World Gold Council. It is a highly interesting, comprehensive, and well documented paper that is an invaluable tool for all central bank reserves managers, an essential read indeed. The release of that Guidance also comes at the right time. Over the last years, we have seen a more and more positive perception of gold as a strategic asset by central banks which have regularly increased their gold holdings. However, central bankers continue asking how to actively manage their gold holdings because the information and understanding of the gold market has been missing. It is true that the gold lending market is an OTC market, and thus, less prone to full transparency, partly due to limitations inherent in price discovery mechanisms. However, gold lending can serve as an important active management tool which can enhance return, of course when market conditions are favourable.
The Guidance Paper provides all the clues to understanding and grasping the functioning of the market and the different factors which drive the gold lease rates. First, there is a need to properly understand the meaning of different terms used: gold deposit rates, gold lease rates (GLR), Gold Forward Offered rate (GOFO). Second, there is a need to understand the different types of gold trades: straight deposits, forwards, swaps, carry trades. And third, there is a need to understand the behaviour of the different actors in the market: miners/refiners, end-users (jewellers, industries), bullion banks, central banks.