Sometimes, one just needs to look in the right place. And often in those cases, it just takes a conversation to alert one where to look. We had a call with a Swiss company this week, to discuss gold financing for their business. They reminded us that there is a negative interest rate on Swiss francs. And then they said that a swap of francs for gold has a cost. That is, the CHF GOFO rate is negative (the dollar based 12-month MM GOFO™ is +2.4%).
Let’s review what GOFO means. The London Bullion Market Association described it:
“[the] rate at which contributors were prepared to lend gold to each other on a swap basis against US dollars.”
In other words, the bank gives you gold and gets dollars in exchange. This is not a sale, but a swap, which means that the gold and dollars return to their original owners at maturity. Here are the steps in the mechanics:
What is the bank doing? The bank buys gold, and simultaneously sells a forward. Neither you nor the bank have any exposure to the price of gold. The bank is carrying gold, not to put it in the warehouse but to swap it to you. Presumably you do something productive with the gold.
Incidentally, this is why all analysis of futures contracts divided by gold in the COMEX warehouses is flawed. It does not count the gold on swap. This gold is in inventory at jewelers, refiners, mints, and other gold-using businesses. It is not in the warehouse, and not counted in eligible or registered inventory.
At any rate (if we couldn’t commit the occasional pun, this economics stuff would get boring) MM GOFO is positive. If you entered into a gold swap on Friday, you would give a bank say $11,900,000 and get 10,000oz of gold. At the end of the year, you would return the same 10,000oz but you would get around $12,185,000. The extra $285,000 dollars come from the positive GOFO.
Why is the gold forward rate positive? Because gold is in contango. Contango is when the price of gold for future delivery is higher than the price for immediate delivery (spot). One can buy spot, sell a future, and make a profit. This is the gold basis, the pretty pictures we show every week in our Report.
The gold basis is positive in US dollars, but not in Swiss francs.
The first question is: Why not. The second question is: What does it mean?
The Swiss franc has a negative interest rate. That means the Swiss commercial banks must pay to park reserves at the Swiss National Bank. The commercial banks don’t necessarily charge small retail depositors. But corporations and institutions generally pay interest to the banks. This is very perverse.
