one and three month GOFO's go negative

derryb

Gold GOFO Rates Turn Negative For The First Time Since Lehman

"And while both Antal Fekete and Sandeep Jaitly, traditionally two of the most vocal pundits in the arena of gold backwardation and temporal and collateral gold market arbritrage, are likely come up with their own interpretations of what may be causing this historic inversion, the reality is that one can't know for sure until after the fact. It may be one of many things:

An ETF-induced repricing of paper and physical gold
Ongoing deliverable concerns and/or shortages involving one (JPM) or more Comex gold members.
Liquidations in the paper gold market
A shortage of physical gold for a non-bullion bank market participant
A major fund unwinding a futures pair trade involving at least one gold leasing leg
An ongoing bullion bank failure with or without an associated allocated gold bank "run"
All of the above

The answer for now is unknown. What is known is that something very abnormal, and even historic, is afoot at the nexus of the gold fractional reserve lending market. "

Looks like the paper is crumbling.

roadrunner

I was sort of shocked to see today's drop out of London down to -.065%, a huge one day drop, and the 14th day down in a row. But not necessarily a sign of continued lower lows
in gold...though falling gofo's are far the most part aligned with falling gold prices. We've had that for roughly 3 weeks.....or since the crush under $1350 occurred.

The Lehman flush was in Sept 2008. Gold bottomed in later October. The negative gold foward rates showed up around 3-4 weeks after gold bottomed (3 consecutive days
of neg rates peaking at -.11%). Note that this lower low in gofo's coincided with gold's November higher low retest. I'd be happy if this were the equivalent of Nov 2008 and
the gold lows were already in 8 days ago. So far, GSR is acting like this is November 2008 (3 previous months were similar Aug-Oct 2008). Need to keep GSR capped in the 65-67
range to keep this "theory" alive.

What was the "historic" inversion in 2008 gofo's from? Credit crunch. It was all through with gold by the time neg rates showed up. Recall that 1 month gofo's fell from around 6.0 %
to -.11% over 2008. Gofo's haven't been above 0.9 % for quite some time with zirp in effect. The gofo inversion this time around could signal the end of gold's flushing and continued
flushing commodities with the stock market soon to follow. 2 coincidences hinting that we could be at the same point as November 2008. GSR completed 3 breakout months
already (Aug-Oct 2008 vs. April-June 2013). And now this same negative gofo situation was not seen until mid-November 2008 several weeks after gold bottomed.

derryb

What appears to be different this time is the decrease in paper demand at a time with increases in demand for physical metal. I believe we are witnessing the meaning of counterparty risk on a scale we have yet to see. I believe somebody big is about to go down.

roadrunner

Negative GOFO rates have preceded sharp rebounds in the gold price before (Sep 1999, Mar 2001 and Nov 2008). As always, no guarantees.

GOFO Rates spell trouble ahead - GOFO: Gold Forwad Offer Rate: these are rates at which contributors are prepared to lend gold on a swap against dollars…

The GOFO rate will be lower than the rate of an uncollateralized loan and should ALWAYS be POSITIVE, meaning it costs more to borrow U.S. dollars than it does gold.
If & when this rate goes negative it means that gold is more precious than dollars…

Essentially it means that gold is removing its bid for dollars! Now go to the LBMA links & look at the negative GOFO & the recent raids on the PM’s…… this means real dollar
denominated credit & demand for $ is shrinking…..

VanHalen

<< <i>...As always, no guarantees. >>



What about death and taxes? I'm still counting on those.

jmski52

What are some uses for GOFO means in the market?

They provide a basis for some finance and loan agreements as well as for the settlement of gold Interest Rate Swaps.

Oh, what a tangled web they weave. Interesting times abound. What the heck would be the purpose of a gold Interest Rate Swap? Never mind that - what, exactly - IS a gold Interest Rate Swap? I'm sure that they do provide some employment for lawyers in the financial system who otherwise might have to work for a living.

The primary reason that physical metals are an advantage in this type of environment - they are real, and they are verifiable. You really can't say that about a lot of paper agreements. As an aside, Corzine was declared a free man today.

tneig

Very interesting stuff. If paper does fall apart, with the past tradition of it setting the physical price, could it not still drag down the physical price even more drastically,
until it separates that is.

Interesting enough, my +$1 over spot source does not want to sell for that low a price anymore.

derryb

<< <i>Very interesting stuff. If paper does fall apart, with the past tradition of it setting the physical price, could it not still drag down the physical price even more drastically,
until it separates that is. Do not look for a complete disconnect anytime soon. The paper market is the established method of metal price discovery.

Interesting enough, my +$1 over spot source does not want to sell for that low a price anymore. >>


physical price will continue to suffer fate of paper price until a disconnect occurs. Premiums will reflect difference in demand until the two different markets are recognized as not being the same thing.

C0INB0Y