Guest Post: Andrew Maguire Discusses GOFO and Gold "Backwardation"

Mon, Jul 29, 2013 - 1:30pm

With LBMA Gold Forward rates remaining negative for an unprecedented sixteenth consecutive day, I asked Andrew Maguire for his opinion on what this means and whether or not it indicates "backwardation" in the global gold market.

Please keep in mind that what you read below is just a snippet of the weekly commentary that Andy provides to all subscribers and members of "Turd's Army". This comprehensive, weekly summary is hands-down the most extensive and valuable bit of information I receive all week. If you are not an active trader but nonetheless someone with a keen interest in the global metals markets, I urge you to subscribe. You can do so by clicking here:

To further the understanding of this condition, Andy also appeared on Max Keiser's program earlier today. Look for that soon on RT or on YouTube tomorrow.


GOFO & Gold Backwardation, by Andrew Maguire

I (Andy) have been asked by some members to allow a section of Commentary to be made public in order to demystify the backwardation argument. As noted it is not my intention to attack good people, however, it is important that the differences between the global cash market and paper markets are understood. Therefore I have agreed, especially as there are a certain mints and brokerages running pooled accounts that IMO have a vested interest in throwing up a smokescreen on this very important subject.

I received some more good questions this week regarding backwardations that need clarifying especially after a series of recent blogs claiming there are no backwardations in Gold. I would first like to say that one of these assertions came from Trader Dan, a person I do not know personally but respect as a good technician and very likely a good trader, too. This response is not an attack upon him or any others who I know have no vested interest in trying to debunk what is clearly the most important signal of physical shortages historically ever seen. In a nut shell, he is comparing apples to oranges. By isolating the real global cash market for gold and then only comparing Comex futures contracts in series out several years, I agree they are largely in contango. But this is a purely US centric Comex paper market phenomenon and has nothing to do with the divergence between the futures market and REAL CASH PRICE of bullion as determined by London fixes each day.

I am not comparing prices in select regions around the world where premiums are anywhere from $6 to $100, I am benchmarking the cash price of gold as determined twice daily in the largest global marketplace for gold in the world, London. When comparing this delivery market vs. the future-dated, largely non-delivery Comex market, then from a real cash wholesale perspective the London spot or cash market dwarfs physical activity on the Comex. This is where an apple becomes an orange and bears little comparison. The LPMCL clears some 700 tonnes of gold and 5000 tonnes of silver every single day. Understood only a portion of these transactions result in physical allocations but the point here is that this is the actual real cash price I can buy or sell my physical twice a day in any size I wish and at a price that has been averaging far in excess of several sets of future prices. This, in simple terms, is what is referred to as real world backwardation, not an isolated set of future paper settlement prices but how the real cash market for gold relates to these synthetic sets.

Nor can gold be lumped in and compared apples to apples to Oil or other commodities. NONE of these commodities trade as an FX currency cross, in other words gold is distinct in that it trades as a currency cross being sold and bought long and short against all other currencies 24 hours a day. The FX price is the real determinate of how much gold can be swapped for $ or vice-versa. Nor is gold consumed, affected by weather, or has a production season etc. Unlike other commodities there is an assumption of an abundant large supply of above ground bullion to meet whatever demand is required at any time.

Sure we can expect to see backwardation occur in gold and silver when we are very close to a front contract expiry but when it happens so far in advance of this event, as we have been tracking for many months, and then even worse, now extending into the next 3 successive months, (August October and progressively in and out of backwardation with GCZ3 December), then there is no argument that can be presented that can explain this as a normal condition, nor has it ever been seen before. It simply means there is an auditable distrust in exchanging physical gold for paper gold, especially when this condition technically guarantees an arbitrage profit by simply selling physical into the spot market at the fix and contractually having to wait a maximum of 30 days, let alone 180 days to be repaid ones physical. When you consider just how long that the largest most liquid gold market in the world has been backwardated against front month futures, (continuing in July for a protracted period of time at $1.60 and at times up to $2.15 above the August Futures contract set to expire in a matter of days), there is very little interest in arbitraging this ‘risk free’ profit in the millions of ounces... then Houston, we have a problem. There is demonstrably little confidence that by giving up your bullion for even a near date paper promise, you will ever receive it back.

Make no mistake though from a physical market perspective, the extreme condition we are currently witnessing in gold should never happen and forewarns of an extremely serious imminent disconnect illustrating a lack of immediately deliverable supply. The fact this condition has existed for such an unprecedented period of time forewarns the paper link to gold is in its final stage of irrelevance and collapse.

Aside from the likes of respected traders such as Dan, do not be fooled by those trying to construct a negative spin on gold backwardation, claiming this condition is of little concern. If not shills with a vested interest in capping gold, then they are making the classic mistake of comparing this condition like for like to oil or other consumable hard commodities.

About the Author

turd [at] tfmetalsreport [dot] com ()


Motley Fool
Jul 29, 2013 - 1:37pm

Backwardation... negative yield curve inversion.

At present gold lease rates are still positive, though LIBOR is lower than the lease rate, hence negative GOFO.

Not backwardation though. :P

It's also important to note that the lease and sellside market is not the same.

So theoretically gold for sale could be plentiful but people unwilling lease would create a negative GOFO.

Still, it points to more systemic strain.

Jul 29, 2013 - 1:39pm
Jul 29, 2013 - 1:40pm


MMMMM Guess not..............

Motley Fool
Jul 29, 2013 - 1:41pm

Comment posted precisely one

Comment posted precisely one minute after the article was posted. hank you for taking the time to read it before dismissing it. <sigh>

Jul 29, 2013 - 1:44pm


SILVER medal!

Very interesting comments from McGuire.

I do appreciate Norcini's commentaries at Jsmineset and traderdan.

As I wrote in a different thread here, if some people want to squabble about the term "backwardation", then call it a Ferguson or Fergie-dated.

The bottom line is that gold is currently preferred over USD's in London.

And, this is natural when GLD loses 13,000,000 ounces in five months from their HSBC custodial vaults at BoEngland and LBMA itself.

As written in an earlier thread, did we really have the "investors" lose control of that gold to the BoE? I have to say that the queen reasserted her authority over the gold in London versus the rabble investors in GLD.

Jul 29, 2013 - 1:46pm

the foo

Is a fast reader and a genius.

Didn't you know?

Jul 29, 2013 - 1:46pm

Apparently Andrew Maguire

will be on the Keiser Report again sometime this week, I hear.

edit - just read the post. Ooops .

Spartacus Rex
Jul 29, 2013 - 1:50pm

Surprise! Yet Another "Guest Post"?

Lord, I am really starting to feel old! Thank goodness lunch break is over, so I am outta here!

Jul 29, 2013 - 2:03pm

Just the Fundamental Facts

WHY? Why is this happening? Loss of confidence in paper currency and paper currency backed assets. Interest rates will remain as low as possible, for as long as possible. QE will remain in place and grow exponentially as debt is destroyed. Remember, in our fractional reserve banking world, debt is currency. As debt is destroyed the currency supply must be increased to keep the system alive. The ZIRP policy will kept in place, so the above can be practiced as long as possible. Once interest rates rise, its game over. Set and match. Since the cost of servicing the debt will be prohibitive. We are witnesses to the ending of this global fiat experiment. Paper currency is fast going the way of the 'Great Auk', which is extinct. People are moving with increasing frequency to the ONLY safe place left to protect wealth - physical gold and silver. Look to the GOFO to remain negetive until this situation is resolved. Could take days, months, or even years. No one knows. What we do know for certain, is that end it will. Welcome to the "new normal".

Motley Fool
Jul 29, 2013 - 2:04pm

Made the comment

Then read. So my first edit was prolly 2 mins later. And my last perhaps 2 mins after that.

Besides, I know the topic. I didn't need to read it before posting some facts.

Swift Boat Vet
Jul 29, 2013 - 2:04pm

Thanks Andrew

Your comments are always appreciated. Thanks for taking the time.


Jul 29, 2013 - 2:14pm

Debunking The Gold-Interest-Rates Myth

Much has been made about the imminent end of the Fed’s ultra-loose monetary policies and the impact on gold. Opinions vary as to when the central bank will begin to taper its quantitative-easing programs, but most agree it will take place sometime this year.

Debunking The Gold-Interest-Rates Myth

Jul 29, 2013 - 2:21pm


told ya

Tabberto Motley Fool
Jul 29, 2013 - 2:31pm


of course, you know sooooo much Fool, its downright scary to behold sometimes. I and many others are in awe. Would you consider offering online lessons, i think you should have your own subscriber site, I'm sure many here would flock to it?

Jul 29, 2013 - 2:41pm

Facts are curious things...

"At present gold lease rates are still positive, though LIBOR is lower than the lease rate, hence negative GOFO."

Issue with causality chain here.

GOFO is, according to the LBMA:

"GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars."

Much like the London fix, this is a value established by market makers.

Gold Lease Rate is the derived metric:

"To show derived gold lease rates, the GOFO means are subtracted from the corresponding values of the LIBOR (London Interbank Offered Rates) US dollar means."

I'm sure that's what you meant, right?

Motley Fool J Y
Jul 29, 2013 - 2:53pm


Yup. My bad.

argent rampant
Jul 29, 2013 - 2:57pm

Gold backwardation

Thanks, Turd and Andrew. Your efforts are much appreciated. I, personally, found that very helpful.

Jul 29, 2013 - 3:01pm

Paper link to gold in

final stage of irrelevance, Bully!

Tabberto Motley Fool
Jul 29, 2013 - 3:16pm

no no

that isnt possible...edit: my reality is now crumbling

letey petey
Jul 29, 2013 - 3:20pm

@DelusionalHatter (from previous thread)

If you are a true libertarian, I am the Sultan of Brunei.

You clutter Main Street with your hubristic delusional (too much lead there Mr. Hatter?) rantings about "liberty" one moment and then the next you denigrate a minority for its pursuit of happiness. True libertarians defend the unalienable rights of ALL to pursue happiness, even when they might find that pursuit to be "icky"** in others. True libertarians know that as long as that pursuit harms no other, it is the libertarians' DUTY to defend the right of that pursuit, for if they do not the statists and those weak enough to be swayed by the tyranny of the majority will rise so that no one is safe to those statist whims.

If you are going to continue to cudgel us with your blovations at least walk your talk!

**You DO find homosexuality "icky" dont you? That is the basis for all your "logic", right?

Jul 29, 2013 - 3:20pm

the fool

Yes, very bad

Yes, very bad Fool and thanks JY for straightening him out. He needs to be put in the corner wearing a pointy hat.

Yes,very bad Fool, and thank-you

Jul 29, 2013 - 3:24pm

The Mad Hatter and the fool

Should go off together and just post to each other some where else!! I am tired of their clutter.

Jul 29, 2013 - 3:27pm

I'm curious

Does this mean that we should see negative GOFO endure until the long prophesied global economic 'event' happens?

It seems eerily reminiscent of the countless times we have seen coin premiums spike after a drop in prices, which is invariably regarded by the PM community as the big paper/physical disconnect heralding the new era, only to disappear once the market gets the physical metal where it is requested.

I predict GOFO is back to 'normal' (whatever that is, certainly non-negative) within a month, and that this whole event is forgotten about shortly after as the community moves on to the next flavor-of-the-week indicator. Is that foolish?

Jul 29, 2013 - 3:29pm
Jul 29, 2013 - 3:33pm


I predict you will be outta here when the spot 'price' starts to motor higher as 'owners' of Gold work out they've been shafted (again) by LBMA members. Is that fool-ish? 

Jul 29, 2013 - 4:01pm

Is it foolish?

Given the massive drawdown of inventory at JPM your 1 month predection is probably bad. However since the JPM eligible is basically empty now, it may take other entities to have significant drawdowns to continue the trend past that month.

Anyway continuous negative GOFO is not necessarily the way it would work. I would advise to expect things to get ... spurty ... as the chaos cascade continues in ever increasing periodicity and amplitude.

Jul 29, 2013 - 4:17pm

You are no fun, ctob

I'm really looking to take the other side of predictions that don't have quite that much thought put into them :P

Anyway, I understand we're already at an unprecedented period with rates in the negative, and it seems like by it's very nature is a condition which is unsustainable, so I'm pretty comfortable it won't last another 30 days regardless of JPMs inventory (or lack thereof). Incidentally, what is the authoritative source for current GOFO?

Jul 29, 2013 - 4:19pm

Jul 29, 2013 - 4:27pm

I have this song stuck in my head

Frank Zappa - The Torture Never Stops (Single Version)
Jul 29, 2013 - 4:39pm


its called the LBMA website

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