To extract a return on a passive commodity asset that yields no natural dividend, central banks participate in international Gold Leasing Markets.
The Alphanumeric Gold Lease Rate Equation
The central bank lends its physical gold bullion to pre-screened commercial bullion banks, earning an interest return known as the Gold Lease Rate (GLR). The relationship is derived mathematically from the London Interbank Offered Rate (Libor) or its replacement overnight index benchmarks and the Gold Forward Offered Rate (GOFO). The plain-text mathematical formula is written as follows:
GLR = Benchmark_Interest_Rate - GOFO_Rate
Where:
- GLR = The net interest rate earned by the central bank on its loaned gold bullion portfolio.
- Benchmark_Interest_Rate = The prevailing short-term nominal money market interest benchmark (expressed as a decimal).
- GOFO_Rate = The Gold Forward Offered Rate—the interest rate at which market participants are willing to swap gold for US Dollar cash assets.
If the global benchmark interest rate is 4.5% (0.045) and the GOFO rate settles at 3.0% (0.030), the plain-text gold leasing calculation is:
GLR = 0.045 - 0.030 = 0.015 = 1.5%