Chapter 6 of 17
Gold forwards, lease economics and the carry curve
Separate observed forward carry, a financing model and the residual costs of actually holding or borrowing deliverable metal.
In this chapter
Specify the model before interpreting the slope #
A simplified continuously compounded carry relation is F = S × exp[(r + u − y)T], where r is cash financing, u is a specified carrying-cost rate and y is a metal benefit or lease-related term under the chosen convention. This is a model, not a universal executable gold-forward quote. Credit, account type, collateral, day count and payment currency can change the actual relationship.
LBMA’s lending guide describes the distinction between lending metal and borrowing or lending through a swap. Do not insert an old published reference series into today’s model and call it a current lease quote. The model’s residual includes what you omitted.
Observed implied carry is not a forecast of spot return #
For a simple annualised reporting convention, implied carry = (F/S − 1) × 365/days. The result describes a price ratio over the defined horizon. It is not the expected return on the metal, and changing day-count convention changes the reported rate.
Contango means the specified deferred price exceeds the nearer reference; backwardation is the reverse. A negative or compressed observed carry can motivate investigation of funding, lease, scarcity or timing. It does not, by itself, prove one explanation or imply that a future directional rally is inevitable.
Separate the curve from a rolled return series #
A continuous back-adjusted futures chart may be designed to suppress roll jumps; it is not an actual traded contract path. A funded book earns or pays the prices, variation settlements, commissions and rolls it actually encounters.
Keep an expiry ladder with bid/ask prices and timestamps. For a calendar-spread study, define units and direction on both legs and separately model what happens if one leg fills or loses liquidity. Apparent small spread risk can coexist with meaningful gross cash requirements.
Test the carry package through its funding path #
Cash-and-carry research needs ownership of the deliverable asset, finance, custody and a feasible delivery or close-out route. Reverse cash-and-carry also needs the ability to borrow or source metal on acceptable terms. Those constraints can be asymmetric.
Stress the cash rate, haircut, lease availability and exit spread jointly. Do not assume that an existing collateral offset survives into delivery. Evaluate the portfolio in both a modest curve move and a severe liquidity dislocation; a carry model does not provide a loss cap.
Measure the unexplained remainder #
Create a bridge from observed forward points to the components in your model. Use a stated rate convention and horizon for every component; a one-month lease quote is not a three-month quantity simply multiplied without justification.
If the remainder changes, investigate data alignment before writing a scarcity narrative. Misaligned FX settlement, different qualities or an out-of-date spot input can dominate a subtle model residual. A good carry note states which part can be replicated and which part remains model-dependent.
Hypothetical worked example
A fictional annualisation and stress
Spot is 2,000 and a 90-day forward is 2,020. Simple annualised carry is (2,020/2,000 − 1) × 365/90 ≈ 4.0556%. The displayed decimal precision does not imply the quotes are that reliable.
Under the separate exponential model, r = 5%, u = 0.5%, y = 1% and T = 0.25 years imply F ≈ 2,022.63. Increasing y to 3% gives about 2,012.54. These are alternative fictional assumptions, not estimates of current funding or metal lease conditions.
Common mistakes
- Treating implied carry as expected gold appreciation.
- Combining simple and continuous rates without conversion.
- Calling a model residual an executable arbitrage.
What does a positive simple annualised forward carry measure in this chapter?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Desk assignment
What to submit
Build a three-expiry curve sheet. Reconcile observed forward points with explicit financing, storage/benefit conventions and a residual. Stress funding and lease assumptions separately.
Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.
Sources and further reading
- LBMA OTC Guide: lending, borrowing and forwards ↗
- CME Group: exchange for related positions ↗
- MCX: gold products and contract specifications ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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