Gold forwards are also referred to as GOFO. The gold forward rate is popularly used to lease and provide collateral for investors. A high gold forward rate implies that the demand for gold is high while a low rate means that the supply exceeds the demand in the market. Just like other conventional forward contracts, a gold forward is a non-standardized contract between two investors to buy or sell gold at a specified time at an agreed price at a given future date. This is different from spot contract for gold where two parties agree to agree to buy or sell an asset on the same day.
Gold forwards are highly customized such that counterparties can determine, alter and define the terms and features of the agreement in order to suit their specific requirements which include the delivery date and time. All the parties in a gold forward agreement are exposed to counter-party default risk in that the other party to the contract may not be able to make the delivery or payment as agreed earlier on.
Transactions for gold forwards normally take place in large private markets that are largely unregulated. These markets consist of investment banks, other banks, corporations and governments. The underlying asset with respect to gold forwards is gold itself or other equivalents of gold. Most gold forward contracts tend to be held to the period of maturity and usually have no or little market liquidity if any.
The price of gold is volatile just like that of any other commodity in the market. Therefore, gold forwards usually provide price protection because the asset is delivered at an agreed date in future at a predetermined price. They can be matched against the period of exposure and for the cause of the exposure in order to provide the buyer a complete edge. They are also flexible, hence can be written for any amount of money and time.