By Martin Whitehead
Manager, Rothschild & Son Ltd

The GOLDFRA - designed to assist in managing movements in gold interest rates - is an agreement between two parties to determine the interest rate that 1vill apply to a notional future loan (or deposit) of an agreed amount of gold for a single interest period of up to one year.

There is no exchange of a notional principal amount, only an agreement that an adjusting payment will be made in one direction or the other. This payment compensates for any movement of interest rates between the contracted rate and the actual market rate on the future date. GOLDFRAs have become increasingly popular with both the official and producer sectors. Producers have over recent years been prolific users of gold interest swaps and as such, the GOLOFRA provides a useful tool for managing short­ term spikes in gold interest rates. The GOLDFRA plays an important role in managing their interest rate exposure.

The Advantages

  • Future interest rate exposure can be hedged without commitment to a specific borrowing or deposit
  • Credit exposure is limited since a GOLOFRA is a contract for difference (i.e., no notional principal amount is exchanged)
  • Transactions are easily reversible at any time prior to the start of the notional loan or deposit period
  • Notional loan or deposit lengths of 1, 2, 3, 6 and 12 months are available
  • Transactions are off balance sheet
  • No fees are payable; the rate quoted represents an all-in cost


A GOLOFRA is settled by the payment of the net difference between the fixed rate agreed at the outset of the transaction and the actual market rate at the future date. As with any forward rate agreement, this difference (payable in gold ounces) must be discounted at the market gold lending rate to account for the fact that it is being settled at the beginning of the notional period rather than at the end. By agreeing a gold reference price at the outset, settlement may be paid in USS. The market gold lending rate is defined as USO LIBOR -GOFO.

Example: On 30th June, counterparty A, a notional lender of gold, enters into a GOLDFRA 3 months against 9 months. They sell 100,000 ounces of a 1.00 % GOLDFRA fixing 28th September for the period 30th September to 31st March. On 28th September (the fixing elate) the actual interest rate period for 6 months is calculated as 0.75% (6 month USO LIBOR minus 6-month GOFO).

Settlement Calculation

Settlement amount (ounces) (S) Notional ow1ces = 100,000 GOLOFRA Price (F) = 1.00Reference rate (USO LIBOR - GOFO) (R) = 0.75Number of days in period (N) = 183(

(F - R) x N / 36000) x notional ounces = S

((1.00 - 0.75) x 183 /36000) x 100,000 = 127.083 ounces

The settlement amount is discounted at the lease discount factor (0.75%) to arrive at a settlement for value 30th September.

S x ( 1 / ( 1 + (N x 0.75 / 36000))= 127.083= I 27.083 x 0.99624 = 126 .606

Counterparty A simultaneously deposits 100,000 ounces for 6 months at 0.75 % and is compensated 0.25% (126.606 ounces) against the GOLDFRA, thus achieving an all-in deposit rate of 1.00%. The overall deposit rate would require C0tmterparty A be given the offered side of the lease rate as a deposit rate and in reality, this would probably be adjusted for a suitable spread, (20 bp), thereby reducing the overall rate to 0.80%.