Gold Trading: GOFO vs Lease Rate

The gold carry trade involves borrowing gold at, say 1%, selling the gold, and then investing the cash at, say 3%. If the gold price doesn’t change, you earn a net 2%. The bigger the net difference the more carry trade return you can earn (assuming a stable price) and therefore more attractive short selling of gold should be – as long as there is an expectation that the gold price won’t rise too far to wipe out the profit from the interest rate differential.

The point of a carry trade is, therefore to “capture the difference between the rates” . The question then is what are the two “rates” and what represents the net difference.  The booklet titled “A Guide to the London Bullion Market” issued by the London Bullion Market Association clearly says:
“Forward rate (GOFO) = Dollar interest rate – metal lease rate”

Therefore the fact is that it is GOFO which represents the “amount that can be earned from the gold carry trade”. GOFO is the measure of the net difference, “the amount that can be earned from the gold carry trade”, not the Lease Rate.
GOFO is called forward offered rate, because it’s the sale of the forward value of gold, in return for USD. 
 
[inspired from http://goldchat.blogspot.com]