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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

BagOfGold Bollocks · Jul 29, 2013 - 9:16pm

Bollocks...there's a war going on in your sauce pan right now...& there are casualties from both sides!...It's advisable to start with the main ingredient first...& cook around it!...By the time you get around to starting at 1.35...it's often too late!!!...

Start at 1.35. Speakers on please.

Cauliflower Indian recipe - How to cook - cauliflower bhaji - Indian Cooking - Pabda20 Cauliflower Bhaji... Bag Of Gold
SilverSurfers · Jul 29, 2013 - 9:19pm

we have a problem. Yeah, but Houston is oil country. What gives, I thought it was about gold.

irrelevance and collapse, cool, about freaking time.

¤ · Jul 29, 2013 - 9:30pm

Breakdown: Gold and Silver Exploration Stocks in BC, Canada

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https://www.visualcapitalist.com/infographics#sthash.X6lZVdJw.dpuf

¤ · Jul 29, 2013 - 9:36pm

When paradigms fail, there is abundant evidence in advance of the trouble. The evidence goes unheeded, even when individuals in charge are aware of it. A Micro-Movie on denial and the dollar.

https://www.youtube.com/watch?feature=player_embedded&v=ivQYTiUaWhE#!

Dagney Taggart · Jul 29, 2013 - 10:17pm

Thanks for the two infographics. Only one point to make: If I were new to PMs, I would argue that I just learned more about the bear argument from the the Bear v. Bull infographic than anything I have read from CerealMan and Fool. As far as I'm concerned they have just been rendered obsolete. They have been nothing but antagonistic twats since conception. Like a "Why? Because. But why? Because I said so." worthless dialogue an ignorant adult has with a curious child. I don't mind an informed contrarian opinion. However, disagreement for the sake of antagonizing people who actually do care about what is going on distracts and adds nothing to the dialogue. Turd, I'm sorry you have to pay for server space for their nonsense. Cost of learning/comedy/horror I guess.

DayStar · Jul 29, 2013 - 10:34pm

GoldCore: The perilous state of world financial markets has been underlined in the last few months with the selloff of all asset classes: stocks, bonds, commodities, and of course, silver and gold. We are just about due for a crisis. We have had them like clockwork over the last thirty years: 1981-82, 1987, 1994, 2000-01, and 2008-09. the intervening periods have been between six and seven years. • Chanyaporn Chanjaroen: A silver vault that can hold 200 metric tons opens in Singapore this week to cater for increasing demand for physical precious metals among Asia’s wealthy. The repository can hold $128 million of silver at today’s prices. • Bill Holter: JP Morgan will exit their physical commodity trading business. They did however specifically say that they were not exiting the Gold or Silver market. You can bet this was done for a very good reason. • Bill Holter: The BOE leased 1,300 tonnes of gold last quarter; a pretty good feat since they only had 400 tonnes. It was used to depress price in a last ditch effort like a wild"haymaker" to get people to sell their metal. If this is the case then it backfired miserably because demand has exploded and reported inventories at Comex, GLD and now the Bank of England are bleeding profusely. • Ted Butler: There continues to be an outburst of what I feel are misleading reports from within the precious metals Internet community. Some of the reports, from declining gold inventories on the Comex, to stories about lease rates and backwardation in gold, to predictions of Comex default or sudden changes in contract delivery terms, have my head spinning. • DS: JPM is reporting less physical gold in its possession than it is currently obligated to deliver. I fail to see how that is not a problem. • James Turk: Market forces overpowering central bank manipulation result in backwardation, which should never happen in gold. This is caused by shortage or tightness of supply. The above ground stock of gold grows consistently year after year by 1.8% per annum, which is not rapid enough to satisfy current demand. Consequently, the present “shortage or tightness of supply” of gold can only be relieved from its existing above ground stock. The only way for that to happen is for the gold price to rise high enough to entice people to exchange their physical metal for dollars. • Andrew Maguire: "From a physical market perspective, the extreme condition we are witnessing in gold should never happen and forewarns of an extremely serious imminent disconnect illustrating a lack of immediately deliverable supply. That this condition has existed for such an unprecedented period of time forewarns that the paper link to gold is in its final stage of irrelevance and collapse." • India's Finance Minister P Chidambaram said Monday the government would continue with its restrictions on gold imports, following the surge in inward shipments of the metal in July. Though imports were low in June, in July the tide appears to have turned again. Gold premiums have almost tripled in India, with jewellers rushing to secure supplies. • Zero Hedge: As physical gold fever shifts to silver, will silver follow gold's fate and see Comex silver vaults start being emptied out slowly at first, then fast? If China and thus Singapore is indeed intent on "warehousing" all the loose precious metals in the world, this is where the action will be in the coming months. All this and more on...

The Harvey Report!

https://www.tfmetalsreport.com/comment/602840#comment-602840

DayStar

Mr. Mark · Jul 30, 2013 - 12:02am

benque I'd have to agree with benque, the CB's ARE the bullion banks. But I'd more accurately refer to them as the shadow bullion banks due to their first level connection to the various govt.'s as hired treasury managers. Kind of gives new meaning to the phrase "you just can't find good help these days". I'd also call them shadow because they farm out the down and dirty work to the money center, primary dealer, bullion banks. Granted they are all part of the same Fed reserve or intl. banking cartel but who is the hammer going to fall on? The CB's? The money center BB's? Both? I guess it's going to depend on who rolls over and cleans house the best and quickest.

dgstage · Jul 30, 2013 - 12:33am

where precious metals cannot be bought, I think so. I also think some platinum and palladium should be part of the play.

Strongsidejedi · Jul 30, 2013 - 1:05am

Turdites, After carefully considering the reports of GLD losing 400 metric tons or more over the past six months, the GOFO could not be ignored. Why would GLD be losing gold due to investor confidence in their Gold position while the royalty and Bank of England were maintaining their gold in their vault? Here's some pertinent dates and data 1999-2001 Gordon Brown's regime reportedly sold off physical gold in the Bank of England vault. 2003 - US regulators allow banks to enter commodities markets 2004 GLD was started. GLD custodian is HSBC in London. Gold in GLD is in Bank of England vault. 2006 Bernanke takes over Fed. 2007-2008 JPM Chase starts precious metals and commodities trading in London. 2008 Global financial meltdown, Obama elected. 2012 Obama reelected Feb 2013 - GLD starts to sell off 400 metric tons of gold. 2013 JPM Chase ends precious metals trading in London. I have to wonder if GLD has been a set up all along. GLD means the weakest investors could own a part of the GLD ETF controlling physical gold. Since so many sovereign governments hold their gold at the LBMA and Bank of England vaults, I have to question if the sovereign governments really have the gold at all. In the case of litigation over ownership, the Queen will rule in her favor in England. GLD could have been a set up. JPM and HSBC would have been complicit in the arrangement because it permitted who ever bought the Queens gold under Gordon Brown to then sell the gold at much higher fiat currency prices just 5-10 years later. If GOFO remains negative, it's a rather clear sign that gold is treated by governments as an alternative reserve currency.

Tabberto · Jul 30, 2013 - 1:58am

CONFIRMATION BIAS and AD HOMINEM tattooed on my knuckles

Roger Rocker · Jul 30, 2013 - 2:09am

Somebody got the wording mixed up. It should be GoLD Offered Forward because anyone lending gold for $US must be GoOFy!

Stack-on!

Jakarta Expat Tabberto · Jul 30, 2013 - 2:25am

Overnight I have decided to get

CONFIRMATION BIAS

and

AD HOMINEM

tattooed on my knuckles

Hmmm... I assume that means fingers and toes or does that include other appendages as well?

Dagney Taggart · Jul 30, 2013 - 2:41am

To go along with "F*ck Me" already written on your forehead? https://www.youtube.com/watch?v=_Qh-cAG1O8s

lnardozi George Clooney · Jul 30, 2013 - 3:06am

TTNS - It's also on Zoot Allures (no it's really spelled that way), one of my favorite albums.

Tabberto · Jul 30, 2013 - 3:21am

If I may offer a suggestion -- there are less permanently attached solutions available:

In 14K/tungsten/90%, the hardness is sufficient for the use case, and the weight is certainly more satisfactory than plain old brass in terms of specific gravity:

brass - casting 8400 - 8700
gold 19320
silver 10490
tungsten 19600

You can switch out the materials as the target audience necessitates...

GoldMania3000 · Jul 30, 2013 - 6:25am

Is there a way you or Andy can find a way to get someone that could actually do his trades for people. I would do that as i have a busy job and don't have time to watch everything during the day etc. and i can't stay up in the middle of the night. it would be a great service. There has to be a way for someone to execute the trades.

DayStar GoldMania3000 · Jul 30, 2013 - 6:47am

I suggested that TF use his tech team to build a robot that would buy and sell a person's account based on Andy's trades. He could sell subscriptions, solve his money problems, and no one has to stay up all hours of the night to make Andy's trades work.

DayStar

boatman · Jul 30, 2013 - 7:07am

almost all those stock guys always believe that.

they believed it in '07.........many said dow 25,000 by 5 years.

believed in the NASDAQ in '00

most of these guys cut their teeth in the '82-'00 secular stock bull market fed[ha!] by the bretton-woods abdication by nixon........from france turning in dollars for gold because of vietnam war debt......

they think this can go on forever, they're Keynesians afterall., and they are emotionally and financially invested in it.

soon the west+japan debt bomb bond market will have something to say about that.

my stock professor guy says dow 16,800 in final wave 5 up before a slide to 7,000 or lower.

Tabberto · Jul 30, 2013 - 7:11am

that was a bit strong! does that count as an ad hominem? can i go complain to the headmaster?

Strongsidejedi · Jul 30, 2013 - 7:56am

https://youtu.be/fIJFOjZKHpw Maloney and the guest explain the gold reserves and lending between central banks.

Willy · Jul 30, 2013 - 7:58am

The GOFO Rates aren't posted this morning? Seems fishy?

Ojibwemowin · Jul 30, 2013 - 8:03am

I hear you loud and clear.

These guys are optimists and Keynesian to some degree. He tells me all the time "there are no bears on Wall Street."

They good ones are flexible. He preaches that the only thing you can count on is change. By the time the DOW is back down below 10,000, they will be well positioned first in cash and then in other sectors and assets. They are good at what they do and a lot smarter than average. 

· Jul 30, 2013 - 8:36am

StrongsideJedi, Good stuff all around!! Interesting list and the video is great for us pea brains. Although, I would take exception to you recent valuation of your contribution here. Your input here is probably worth slightly more.

tmosley · Jul 30, 2013 - 8:47am

Willy:

I was wondering if today was Groundhog day, but someone else noticed it too.

Next up: they stop publishing GOFO rates just like they did SIFO rates.

erewenguy Just A Regular Guy · Jul 30, 2013 - 9:15am

There's a + in the column for Jim Willie's DB call

· Jul 30, 2013 - 9:23am

@Ojibwe

Actually, the occupancy rate of Haiwaan hotels are slightly down from last year. 

When you have a chance walk into any luxury car dealer, Porsche, Lamborgini etc, and ask the salesman so how's business? He'll smile and tell ya "very good indeed" That's because his clients can always afford it. And yes, QE is meant to make booms and bubbles so CEO's can buy new corporate jets with roll down windows so they can flick their cigar ashes over the city of Detroit and many similar cities when they fly by. Tell all those people who lost their pensions that they have four more years.

And I'd be telling my children to open up a food truck outside one of the big banks on wall street or along Park Avenue to sell the suits $20 lobster sandwiches. That's actually happening and walked by one of those trucks and the line was around the block for a $20 sandwich. Much quicker way of getting that down payment for that first house, then 4 year engineering school and loans.

I have no argument that as a result of QE people will get rich. There is fiat to be made, IF, you know where to put your hat including in the broader market. However, the Happy Days are here again is EXACTLY what I've been waiting for. Once people decide it's safe to go back in the water because people are making money, you've probably waited too long. The boom/bust cycles are quickening and becoming more erratic. Nothing wrong with optimism as long as you recognize the same conditions that have created 20 plus boom/bust cycles are present. The international banksters are doing everything they can to prevent contagion that they created. And if for some reason Sinclair is right that bail-ins happen tomorrow, or Jim Willie is right (and I'm not convinced it is tomorrow) watch how fast happy days go out the window. Bail-ins won't happen because Jim Sinclair says so or because it happened in Cyprus but because the Bank of International Settlement and the G 8 countries wrote up the plan for you to read. Forget what anybody says, read it for yourself. Whatever fiat you can make under the Happy Days umbrella make sure you spent that fiat well. Happy Days aren't forever. Never have been. Never will be under Fed policy.

It's safe to get in the water. 

Jaws (1975) - Get out of the Water Scene (2/10) | Movieclips
Ojibwemowin · Jul 30, 2013 - 9:38am

That is interesting that you mentioned waiting yourself for the "Happy Days are here again" moment, versus only trying to manage one's affairs to gaurd against a sudden and dramatic worldwide "Minsky moment" with just physical metal on your side. When the good times are really rolling again is when one should probably start to get more defensive, however you want to position that for yourself. The optimal time to have been in the Dow, while rotaing from defensives to cyclicals was several years ago. They understand the rotation of sectors with the business cycle very well and acknowlege many of the factors we have discussed here. There is still room on the upside now, they would argue in many sectors of the stock market. The good investors are also contrarians in the sense that they like to sell at the point that many have flooded in, and buy when most have been wiped out. He is conservative in this area and does not try to time his moves for "optimal" results in this regard. He knows when to take the cream off the top and cherry pick the bottoms. They have reason to be optimistic that they have the ability to time things to their client's advantage.

· Jul 30, 2013 - 9:48am

Obi-skip the broker and pull up some charts for companies that manufacturer bullets, weapons of mass destruction ie military stocks (Obama said he was cutting back blah, blah, blah,) toilet paper, and off planet mining operations (they exist). I call this the the full proof SHTF Portfolio. I'm extremely optimistic. War is the gift that keeps giving.

tmosley · Jul 30, 2013 - 10:05am

They finally posted the GOFO rates just now. They remain negative, with the three month slightly more negative, and the one month slightly less negative than yesterday.

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