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.

About the Author

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  156 Comments

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

Thanks Andrew

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

Swifty

hai
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

punchbowl
Jul 29, 2013 - 2:21pm

See

told ya

TabbertoMotley Fool
Jul 29, 2013 - 2:31pm

hahaha

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 FoolJ Y
Jul 29, 2013 - 2:53pm

JY

Yup. My bad.

Key Economic Events Week of 4/6

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argent rampant
Jul 29, 2013 - 2:57pm

Gold backwardation

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

Patrancus
Jul 29, 2013 - 3:01pm

Paper link to gold in

final stage of irrelevance, Bully!

TabbertoMotley Fool
Jul 29, 2013 - 3:16pm

no no

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

mack
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

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