Gold Derivatives: Gold Derivatives: - World Gold Council

Gold Forward Lease Rates 1993-99
5.0
Rolling monthly averages (%)
4.5
4.0
1 mth
3.5
2-3 mth
4-6 mth
3.0
7-12 mth
2.5
2.0
7-12 mth
1.5
1.0
0.5
1 mth
0.0
93 94 95 96 97 98 99
Source: Own calculations; Reuters
The chart shows the evolution of the term structure over time. It shows the 1
month spot rate, and the implied forward rates for borrowing 2-3 months forward,
4-6 months forward and 7-12 months forward. The upward sloping term
structure was a persistent feature of borrowing rates in the gold market, being
reversed only at times when the level of rates was high. The longer forward the
borrowing, the more expensive it is and the more stable is the rate.
5.3.2 How does the term premium behave?
The term premium – the difference between the cost of borrowing long, and the
expected cost of borrowing over the same period by a series of short-term contracts
– is not directly observable since we do not know the market's expectations
of future rates. But we can estimate the premium by constructing a forecast of
future rates, based on current rates, which would have worked well historically.
We focus on the one and three month rates 6 and compare the change in 1 month
rates over the next two months with the slope and level of the current term structure.
Specifically, we run the following regression for all months t:
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Gold Derivatives: The market impact