Electronic copy available at: http://ssrn.com/abstract=1365180

Swiss Finance InstituteResearch Paper Series N°0

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On the Lease Rate, the ConvenienceYield and Speculative Effects in theGold Futures Market

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

Electronic copy available at: http://ssrn.com/abstract=1365180

Established at the initiative of the Swiss Bankers' Association, the SwissFinance Institute is a private foundation funded by the Swiss banks andSWX. It merges 3 existing foundations: the International Center FAME, theSwiss Banking School and the Stiftung "Banking and Finance" in Zurich.With its university partners, the Swiss Finance Institute pursues theobjective of forming a competence center in banking and financecommensurate to the importance of the Swiss financial center. It will beactive in research, doctoral training and executive education while alsoproposing activities fostering interactions between academia and theindustry. The Swiss Finance Institute supports and promotes promisingresearch projects in selected subject areas. It develops its activity incomplete symbiosis with theNCCR FinRisk. The National Centre of Competence in Research “Financial Valuation andRisk Management” (FinRisk) was launched in 2001 by the Swiss NationalScience Foundation (SNSF). FinRisk constitutes an academic forum thatfosters cutting-edge finance research, education of highly qualified financespecialists at the doctoral level and knowledge transfer between financeacademics and practitioners. It is managed from the University of Zurich andincludes various academic institutions from Geneva, Lausanne, Lugano,St.Gallen and Zurich. For more information seewww.nccr-finrisk.ch.This paper can be downloaded without charge from the Swiss FinanceInstitute Research Paper Series hosted on the Social Science ResearchNetwork electronic library at:

http://ssrn.com/abstract=1365180

Electronic copy available at: http://ssrn.com/abstract=1365180

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

G. Barone-Adesi

Swiss Finance Institute, University of Lugano, Lugano Switzerland

H. Geman

Birkbeck College, University of London, London, England

J. Theal

Swiss Finance Institute, University of Lugano, Lugano, Switzerland, john.theal@lu.unisi.ch

March 12, 2009

Abstract

By examining the gold leasing market and employing data on the gold forwardoffered rate (GOFO) and derived lease rates, we propose that rather than using theinterest-adjusted basis as a proxy for the convenience yield of gold, the convenienceyield is better approximated by the derived gold lease rate. Additionally, using theinterest-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 resultssuggest that the lease rate has an asymmetric relationship with the level of discretionary inventory, which we calculate using weekly inventory data obtainedfrom the COMEX futures trading exchange. Linear regressions of the level of discretionary inventory on lagged lease rates reveals that, for short-duration goldleases, bullion repayments result in decreased inventory levels. After controlling for speculative effects, we show that only leases of one month maturity have astatistically significant effect on inventory levels, and thus conclude that speculative pressure acts to increase the amount of bullion available to the gold futures market bydecreasing the repayment effect. Finally, we show that the presence of speculation ingold futures contracts can be associated with increased futures contract returns andthat this effect increases with increased futures contract maturity. These resultssuggest that speculation plays a significant role in the COMEX gold futures market.

Key words:

central bank, commitments of traders, commodity market, convenienceyield, gold futures, gold leasing, speculation

JEL classification:

C22, E44, G15

On the Lease Rate and Convenience Yield of Gold Futures

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Barone-Adesi, Giovanni, Geman, Hélyette and Theal, John (2009). On the Lease Rate, the Convenience Yield and Speculative Effects in the Gold Future... (More)