On the Lease Rate, the Convenience Yield and Speculative Effects in the Gold Futures Market

Giovanni Barone-Adesi, Helyette Geman and John Theal
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Giovanni Barone-Adesi: University of Lugano and Swiss Finance Institute
Helyette Geman: Birkbeck College, University of London, London, England
John Theal: University of Lausanne and Swiss Finance Institute

No 09-07, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: By examining the gold leasing market and employing data on the gold forward offered rate (GOFO) and derived lease rates, we propose that rather than using the interest-adjusted basis as a proxy for the convenience yield of gold, the convenience yield is better approximated by the derived gold lease rate. Additionally, using the interest-adjusted basis as opposed to the lease rate can lead to incorrect inferences pertaining to the convenience yield. Using the lease rate, we study the relationship between gold leasing and the level of COMEX discretionary inventory. The results suggest that the lease rate has an asymmetric relationship with the level of discretionary inventory, which we calculate using weekly inventory data obtained from the COMEX futures trading exchange. Linear regressions of the level of discretionary inventory on lagged lease rates reveals that, for short-duration gold leases, bullion repayments result in decreased inventory levels. After controlling for speculative effects, we show that only leases of one month maturity have a statistically significant effect on inventory levels, and thus conclude that speculative pressure acts to increase the amount of bullion available to the gold futures market by decreasing the repayment effect. Finally, we show that the presence of speculation in gold futures contracts can be associated with increased futures contract returns and that this effect increases with increased futures contract maturity. These results suggest that speculation plays a significant role in the COMEX gold futures market.

Keywords: central bank; commitments of traders; commodity market; convenience yield; gold futures; gold leasing; speculation (search for similar items in EconPapers)
JEL-codes: C22 E44 G15 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2009-03
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (2)

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