LIBOR (London Interbank Offered Rate)

The London Interbank Offered Rate (LIBOR) is the interest rate at which large global banks offer to lend funds to one another in the international interbank market. It measures the cost of funds to large institutions operating in the London financial market or with London-based counterparties. LIBOR is administered by the ICE Benchmark Administration and published by Thomson Reuters. It is calculated for five currencies (U.S. dollar, euro, pound sterling, Japanese yen and Swiss franc) and seven borrowing periods (overnight, one week, and 1, 2, 3, 6 and 12 months). The most commonly quoted rate is the three-month U.S. dollar rate.

LIBOR is the key benchmark for short-term interest rates in the world. It is a reference rate for many financial products (such as interest rate swaps, mortgages, corporate loans and so on) worth hundreds of trillions of U.S. dollars. This is why the LIBOR scandal was one of the most important manipulations in the history of financial markets.

LIBOR and Gold

The London Interbank Offered Rate is also important for the gold market. First, it is one of the most important interest rates in the world. The price of gold is affected by interest rates, therefore changes in LIBOR could have an impact on the gold market. But what really counts for the gold market are real interest rates. This is why the chart below shows no reliable correlation between the London Interbank Offered Rate and the price of gold. However, the plunge in LIBOR at the beginning of the 2000s and then again after the financial crisis of 2007-2008 could supported the gold bull market.

Chart 1: The price of gold (green line, left axis, London P.M. Fix) and LIBOR (red line, right axis, 3-month U.S. dollar rate in percent).

Gold price and LIBOR

Second, LIBOR affects the gold lending market. The gold forward offered rate generally follows the London Interbank Offered Rate – the former is the swap rate for a gold-to-U.S. dollar exchange, while the latter is the dollar’s interest rate. Therefore, when the Fed’s zero interest rate policy pushed down LIBOR near zero in late 2008, the GOFO followed. The London Interbank Offered Rate also affects the gold lease rate, as the latter is derived as LIBOR minus the gold forward offered rate. For example, the surge in LIBOR (due to global turmoil and the jump in risk premiums) and negative GOFO (backwardation in gold) caused the spike in gold lease rates in 2008.

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