Many of the Goldbugs will be happy to hear that the London Bullion Market Association (LBMA) says it might start charging member banks more or even dissolving the Gold Forward Offered Rates (GOFO) – the rate at which dealers will lend gold against US dollars – due to new financial market regulations.
The push for regulation stems from the Libor (London Interbank Offered Rate) manipulation scandal in 2012. The International Organisation of Securities Commissions (IOSCO) has been looking at how to supervise market benchmark setters.
The truth behind gold lending was also the expansion of the market and added liquidity. During the 1970s, the way OPEC members could legally earn interest under Islamic law was to “buy” gold and “sell” it forward collecting the difference that was not formally called interest.
The OPEC nations ran their money in gold in this manner and that helped create the liquidity to launch gold as a viable futures contract before 30-year bonds hit in 1977 and even the S&P500 futures that did not appear until 1985. It was gold that was the leader in creating an international marketplace. If gold can no longer be used in this manner, there will be liquidation of gold holdings by those who still use it to park money and earn unofficial interest for religious reasons.
The Chairman of LBMA told Reuters reporters on Sunday that the new principles require the body to “look at how data is collected, how it’s recorded, who is administrating it.” If members decide that they “don’t need to spend more money on regulatory affairs […] then the GOFO might not exist.”
This could be bearish for gold and actually reduce its liquidity. Money has parked in gold for religious reasons. If there no possibility of income, there is no reason to park cash in gold for religious institutions. Some will immediately disagree and claim money is there because it’s bullish on gold. That is like saying everyone in New York is a banker. In any market, people buy for a variety of reasons. It is NEVER a single act that causes all people to buy or sell. You cannot reduce it to a single cause and effect.