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 ()


argent rampant
Jul 31, 2013 - 7:13pm

@Acientmoney (OT, but had to interject on this point)

Not to detract from the overall theme of your post, with which I wholly agree, I would like to make a correction to your statement about the internet being invented for military purposes. That is a story that has gained a lot of traction lately and it's not really accurate.

The internet evolved from multiple resources over a period from the mid 60's to the early 90's when the worldwide web was born.

It was "invented", or more correctly, "evolved and refined" by a series of academic researchers, some sponsored by the DoD, but it was invented because they, like academic researchers will do, had to find ways to communicate information better, and it grew naturally through the innovation of various people, from there to become a public and commercial phenomenon. DoD sponsorship played a key role in the beginning, but to say the internet was invented for military purposes is rather misleading. The government did not create the internet, and deserves no real credit for it's birth.

Most of the following is c&p from selected wikipedia articles (my apologies for font discrepancies):

The earliest ideas for a computer network intended to allow general communications among computer users were formulated by computer scientist J. C. R. Licklider of Bolt, Beranek and Newman (BBN), in April 1963, in memoranda discussing his concept for an "Intergalactic Computer Network". Those ideas contained almost everything that composes the contemporary Internet. In October 1963, Licklider was appointed head of the Behavioral Sciences and Command and Control programs at the Defense Department's Advanced Research Projects Agency — ARPA (the initial ARPANET acronym). He then convinced Ivan Sutherland and Bob Taylor that this computer network concept was very important and merited development, although Licklider left ARPA before any contracts were let that worked on this concept.[5]

The public was first introduced to the concepts that would lead to the Internet when a message was sent over the ARPANet from computer science Professor Leonard Kleinrock's laboratory at

University of California, Los Angeles (UCLA), after the second piece of network equipment was installed at Stanford Research Institute (SRI). Packet switched networks such as ARPANET, Mark I at NPL in the UK, CYCLADES, Merit Network, Tymnet, and Telenet, were developed in the late 1960s and early 1970s using a variety of protocols. The ARPANET in particular led to the development of protocols for internetworking, in which multiple separate networks could be joined together into a network of networks.

In 1982, the Internet protocol suite (TCP/IP) was standardized, and consequently, the concept of a world-wide network of interconnected TCP/IP networks, called the Internet, was introduced. Access to the ARPANET was expanded in 1981 when the National Science Foundation (NSF) developed the Computer Science Network (CSNET) and again in 1986 when NSFNET provided access to supercomputer sites in the United States from research and education organizations. Commercial Internet service providers (ISPs) began to emerge in the late 1980s and early 1990s. The ARPANET was decommissioned in 1990. The Internet was commercialized in 1995 when NSFNET was decommissioned, removing the last restrictions on the use of the Internet to carry commercial traffic. [Edit: Most ISP's, such as AOL, were founded about that time]

At the same time, Rick Adams, a researcher in Northern Virginia developed a concept to make the (D)ARPANET more accessible to non-defense users. He called it Unix to Unix networking or UUNet. Adams was responsible for the first widely available Serial Line IP (SLIP) implementation and founding UUNET, thereby making the Internet widely accessible. In 1982 he ran the first international UUCP e-mail link at the machine seismo (owned by the Center for Seismic Studies in Northern Virginia), which evolved into the first (UUCP-based) internet service provider, UUNET. [Edit: I worked at UUNet in the early 90's. It was acquired by MCI-WorldCom and now is part of Verizon's empire and still a huge part of the internet backbone worldwide.]

The concept of the worldwide web is credited to (Sir) Tim Berners-Lee of the UK. TimBL, as he's known, introduced http in 1989. Berners-Lee is now director of the World Wide Web Consortium (W3C), which oversees the Web's continued development. He is also the founder of the World Wide Web Foundation, and is a senior researcher and holder of the Founders Chair at the MIT Computer Science and Artificial Intelligence Laboratory (CSAIL).[6] He is a director of the Web Science Research Initiative (WSRI),[7] and a member of the advisory board of the MIT Center for Collective Intelligence.[8][9]

StrongsidejediJakarta Expat
Jul 31, 2013 - 1:19pm

@JakExpat - not missing bars in London? (re: AM conclusions)

@JakExpat -

My analysis is different and diverges from the conclusions by AM.

Here's more data:

From the World Gold Council via Wikipedia, you can see that the Commonwealth nations are a relatively meager player in the holding of gold reserves. That is most intriguing because LBMA claims to be the largest gold market on the planet. But, somehow, United Kingdom gold reserves places it far behind the top 10 and at 18.

If the WGC report repeated at Wikipedia is accurate, then GLD lost more gold in the last five months than the entire United Kingdom gold reserve reported to the World Gold Council.

Someone was claiming that 1200-1300 ounces of gold were sold out of London in the last months. I say rubbish. There were no bars moving "out" of any London vault.

I doubt that the UK is allowing any gold bars to leave their borders. After all, this is the same nation that is watching Wikileaks like a hawk and not allowing Julian Assange to step foot out of the Equadorian embassy.

So, the UK has 300 metric tons and China has 1000 mt of gold by the July 2013 report.

If the UK has sold off 1300 ounces, are you guys saying that they had 1600 mt last year?

I think some people are confusing paper title with the actual bar.

see this :

"Treasure trove: The Bank of England's vault under central London contains 4,600 tons of the precious metal, worth an incredible £156billion"

The UK apparently does not lay claim to these 4600 tons of gold bars.

What is clear is that the accounting metrics and work done at LBMA is shoddy.

As the Queen herself says, it is a bit "lax".

Complacency is not the word I would use.

I would be in the Queen's camp on the description, lax is being courteous and regal.

In America, I would say "weak work", "lacking transparency", and "a relatively poor level of disclosure".

In fact the accounting is so poor that it appears to lack inventory statements and LBMA fails my tests for accounting by generally accepted principles (i.e. count the bars and publish the numbers).

LBMA will need to be far better at posting clear inventory by members of the market.

Jul 31, 2013 - 12:24pm


ah, what going on with AM's smoking gun, confidential, top secret, hush hush, exclusive behind closed doors yatkie yak, before the CFTC? Just Curious

Silver's sell off so far is not characterized by the vertical cliff down draft, suggesting it a market sell off, rather than a pre-planned dump. Just Noticing

Jul 31, 2013 - 12:24pm
Jul 31, 2013 - 12:08pm

A snippet from Gary North's excellent article . . .

on myopic surveillance state:

"The surveillance state is now unstoppable politically. Legally, there is no possibility that it will be rolled back. It is now the non-law of the land. Wyden thinks the voters may roll it back. They won't. It is unstoppable politically.

But this does not mean that it is inherently unstoppable. On the contrary, it is eminently stoppable. It will be stopped. Economics will stop it.

The ability of any bureaucracy to make decisions is limited by its ability to use the data at its disposal to make rational decisions. Ludwig von Mises in 1920 showed why all central planning by the state is blind. It has no free market to guide it. There are no prices to guide it. The state is inherently myopic. His 1944 book, Bureaucracy, extended this theme. The more that a bureaucracy seeks omniscience in its quest for omnipotence, the more short-sighted it becomes. I put it this way: it bites off more than it can chew. In the case of the NSA, it bytes off more than it can chew.

Bureaucrats are time-servers. They are not original. They are turf-defenders. They are career-builders. They are not entrepreneurial. That was Mises' point in 1944. The key goal of a bureaucrat is this: "Don't make a mistake." In short, "do it by the book." It does not matter which bureaucracy we have in mind: CIA, FBI, NSA. The attitude is the same, because the financing is the same: from the government.

When the government goes bust, the surveillance state will go bust. Mises was right in 1920, and the fact that Congress is impotent to roll back the surveillance state is not proof of its irrevocable nature. It is proof of its financial dependence on Congress. Anything that is dependent on Congress financially is doomed. Mises was right in 1920. He was right in 1944.

Wyden trusts in the wisdom and power of political democracy. He is naive. He should trust in the free market. People's day-to-day economic decisions are the heart of the matter, not their occasional voting. The individual decisions of people in the market will ultimately thwart Congress and the surveillance state. The free market's signals, not the phone taps of the NSA, will shape the future. The bureaucrats' quest for omniscience and omnipotence will come to a well-deserved end, just as it did in the Soviet Union, and for the same reason. The state is inherently myopic: short-sighted. Computers make it blind. The state focuses on the short run. Computers overwhelm bureaucrats with short-run information.

Let us not forget that the Internet was invented by DARPA: the military's research branch. It invented the Internet to protect the military's communications network from a nuclear attack by the USSR. Today, there is no USSR. There is the World Wide Web: the greatest technological enemy of the state since Gutenberg's printing press. The state is myopic."

Jakarta Expatancientmoney
Jul 31, 2013 - 11:56am

@Ancient & SSJ

If this is really how is it is interpreted by Elizabeth II then what happens when she starts asking questions about this missing gold bars? She will surely be pressing some one hard about but how could they explain this mishap and all of the bad press the BOE is getting today?

Any speculation on ramifications?

Nick Elway
Jul 31, 2013 - 11:46am

@SSJ Bloomberg comment on SNB

SSJ, Thanks for your original research. Research is a blessing in this era where everybody cuts and pastes other people's comments. I'm guilty of C&P here, with a Bloomberg quote that 20 per cent of SNB reserve is in London

The SNB’s gold holdings are the target of a popular initiative, which demands that at least 20 percent of the central bank’s assets be in the form of gold. The measure would also block the sale of such holdings and require all SNB gold to be located in Switzerland. Currently, about 20 percent at the SNB’s gold is held at the Bank of England and another 10 percent at the Bank of Canada, with the remainder stored domestically.

Perhaps the Swiss People's Party (they did the initiative) has some good information? Perhaps a turdite knows someone in Swiss People's Party?

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Jul 31, 2013 - 11:37am

Alisdair seems pretty sure that BoE has effectively . . .

come clean in slyly saying 100,000 gold bars are poofed: "Is the difference of 100,000 bars a mistake? The wording suggests not. The Bank appears to have thought that if it said in the virtual tour, “over 400,000 bars in custody” it would be sufficiently vague to be without meaning; but it is so much less than the figure in the Annual Report dated only four months earlier that it is unlikely to be a mistake. We must therefore conclude that they meant what they said, and that some 1,300 tonnes has left the vault since 1 March. We now consider where this gold has gone. Gold demand in Europe began to accelerate after the Cyprus debacle at a time when Chinese and Indian demand was also growing rapidly. Meanwhile mine production was steady and scrap sales in the West were diminishing. This was leading to a crisis in the markets, with the bullion banks caught badly short. Hence the need for the price knock-down in early April. The price knock-down appears to have been engineered on the US futures market, triggering stop-loss orders and turning a significant portion of ETF holders bearish. However, the lower price of gold spurred unprecedented demand for physical gold from everywhere, considerably in excess of ETF sales. The fact the gold price did not stage a lasting recovery tells us that someone very big must have been supplying the market from mid-April onwards, and therefore keeping the price suppressed. So now we have the answer. The BoE sold about 1,300 tonnes into the London market, which given the explosion in demand for physical at lower prices looks about right. This leaves us with two further imponderables. It seems reasonable given the acceleration in global demand that the bulk of the gold supplied by the BoE has gone to the non-bank sector around the world. In which case, the bullion banks in London still have substantial uncovered liabilities on their customers’ unallocated accounts, on top of the leases being rolled. The second is a question: how much of the remaining 1,580 tonnes not-accounted-for last month been sold since June? Conflating these two imponderables, unless the BoE can ship in some more gold sharpish, there is unlikely to be enough available to supply the market at current prices and bail out the bullion banks in London, so they must still be in trouble. The supply of gold for lease seems to have diminished, because the Gold Forward Rate has gone persistently negative indicating a shortage. It appears the leasing scheme, whereby central bank gold is supplied into the market, has finally backfired. Prices have risen over the period being considered and leased gold has disappeared into Asia at an accelerating rate never to return. While the bullion banks operating in the US futures market have got themselves broadly covered, the bullion banks in London appear to have passed up on the opportunity to gain protection from rising bullion prices. The final and fatal mistake was to misjudge the massive demand unleashed as the result of price suppression. This was a schoolboy-error with far-reaching consequences we have yet to fully understand." Snippet from the link Turd posted above.

Jul 31, 2013 - 11:28am


Thanks for peeling another layer of the onion away for us

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