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

156
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: https://www.coghlancapital.com/andrew-maguire-gold-trading

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.

TF

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.

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  156 Comments

Motley Fool
Jul 29, 2013 - 1:37pm

Backwardation...

...is 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.

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

BRONZE

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>

Strongsidejedi
Jul 29, 2013 - 1:44pm

SILVER!

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.

punchbowl
Jul 29, 2013 - 1:46pm

the foo

Is a fast reader and a genius.

Didn't you know?

Bollocks
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!

dropout
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.

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