Mystery Theater: GOFAUX artifacts and Germanic bankster tragedy

Fri, Sep 6, 2013 - 4:09pm

As you may have noticed, there has been a bit of discussion lately about the GOFO – the Gold Forward Offered Rate, published by the LBMA and generated by the member banks. According to the LBMA, it “represent the rates at which dealers will lend gold on a swap basis against US dollars”.

In more detail from the official LBMA FAQ (emphasis mine):

“The contributors are the Market Making Members of the LBMA: The Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Société Générale and UBS AG.

The means are set at 11 am London time. These are the rates shown on the LBMA website. 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. These rates are also available on the LBMA website.

At 10.30 am London time, the Reuters page is cleared of all rates. Contributors then enter their rates for all time periods. A minimum of six contributors must enter rates in order for the means to be calculated. At 11.00 am, the mean is established for each maturity by discarding the highest and lowest quotations in each period and averaging the remaining rates.

They provide a basis for some finance and loan agreements as well as for the settlement of gold Interest Rate Swaps.”

All of the numbers displayed in the charts below can be found at these sources:

LBMA Gold Forwards

LBMA Gold Fixings

SPDR GLD Historical Data

The more recent activity of the various maturities can be followed here:

  Image cannot be displayed

The longer-term picture looks thus:

  Image cannot be displayed

Unsatisfied with the clarity these charts provide as to HOW exactly GOFO may presage up- or downturns in gold price (which is a perennially popular, yet to my feeble mind insufficiently explained 'truism'), I decided to play around with the numbers a little bit. Everything that follows on this topic is pure ‘sophistry’ for lack of a better term. None of the metrics displayed have been sanctioned by any precious metals gurus, analysts, bankers or economists (that I know of – though examples of similar approaches would be very welcome).

So, what is a lad to do when trying to analyze a trend over time, and the straight numbers don’t offer clarity? Why, make the dataset more complicated, of course! What I’ve done below is remarkably simple (and only debatably useful) – calculated the per-ounce cost of borrowing gold on a swap basis against USD, adjusted to the prevailing gold price at the time. Behold: GOFAUX™

  Image cannot be displayed

In the interest of saving a bit of time, I will spare you the other (less productive) rabbit holes I went down and try to cut straight to the chase. But one interjection is needed – why plot the data only from 2000? A strange little set of things happened from 1999 onwards, timeline courtesy of Bloomberg:

May 1999: Bank of England announces sales of gold reserves in five auctions.

August 1999: Gold falls to low of $251.95

September 1999: First Central Bank Gold Agreement announced where 15 European central banks including the European Central Bank agreed to limit collective sales to 2,000 metric tons over five years through 2004.

2003: First gold-backed exchange-traded fund started.

March 2004: Second Central Bank Gold Agreement limiting collective sales of European central banks to 2,500 tons through 2009.

November 2004: SPDR Gold Trust, world’s biggest gold-backed exchange-traded fund, created.

So, suspending disbelief for a moment, please consider the following in light of the fact that you are reading the ramblings of a dope with a spreadsheet and a penchant for goal-seeking patterns that he WANTS to be able to see:

  • There is an odd similarity in the shape of the GOFAUX™ (daily GOFO x daily gold PM London fix price) curve and that of the prevalent gold prices ca. 1358 days later (the average of the timespans between ‘peaks’ and ‘lows’ on the chart).
  • Any and all economic, financial, demographic data – heck ANY data controlled and disseminated by .gov, banks and MSM is suspect. The very basis of all of this could very well be mere fantasy based on garbage in, garbage out.
  • There could be NO rational connection between DAILY gyrations in GOFO and gold prices from 4.5 years ago to the activity of the gold markets TODAY. Could there? This has all got to be irrelevant, arbitrary conjecture from a dilettante.
  • Well, I thought there has GOT to be some fallacy involved in my train of thought. There MUST be a fundamental (and quite simple) obvious explanation for seeing this. And there very well may be, I look forward to your thoughts on this.

    But taking this madness one step further, I did one more transformation – I shifted the dates for this arbitrary and artificial GOFO/ounce metric by the average number of days between peaks/troughs ‘observed’ (capriciously picked by eyeballing the chart in haste, due to a lack of graphing/analytic software to plot and capture ACTUAL highs and lows, slopes, differences and retracements). The chart below displays gold price in ‘real’ time, and lined up with it shows the GOFAUX average values from 1358 trading days prior.

      Image cannot be displayed

    The correlation coefficient for the 1,130 data points involved: 0.9063. If the thought process and underlying data could be considered sound, the odds of this occurring by chance would be VERY CLOSELY asymptotic to zero.

    In the interest of getting this posted, further detailed speculation on this imaginary and potentially specious metric will have to wait for another day. But some baseline assumptions/questions:

  • Is it POSSIBLE that entities (banks, dealers, hedge funds, ETFs, sovereigns and agents of all of the above) engaged in MASSIVE amounts of gold leasing and lending in the 2004-2008 timeframe, creating (unreported) long-term lending agreements with (unreported) swap/lease rates, with a maturity of, oh I dunno, 5 years or so?
  • Could the current activity we are witnessing in both gold prices and GOFO rates be in part due to the expiration of these contracts on a very literal, day-by-day basis? What, exactly WOULD we expect to be happening if this were the case? How would registered/disclosed gold inventories change? What exactly would the lessor and the lender be doing, what specific assets would they be moving (or not moving) upon reaching the maturity of these make-believe long-term gold lending contracts?
  • GOFO can clearly go negative, while actual gold price cannot (at least in accounting terms). The correlation depicted above HAS to break at some point between now and 4.5 years from now (when the negative average GOFO rate would drag the GOFAUX in to subzero values). WHEN, exactly, can this be expected to occur?
  • Completely non-sequitur (?) secondary mystery of the week -- question for the German-speaking Turdites (and perhaps Jim Willie's source):

    There is a potentially very bizarre (though of course possibly explained via completely mundane reasons) scandal of sorts in the German/Swiss financial sector that caught my eye. There was an article (and embedded compilation of links to background stories) that sounds like something straight out of Jim Willie’s accounts:

    “New details are emerging about the suicide of Pierre Wauthier, the 53-year old CFO of Zurich Insurance, that can only be bad for Josef Ackermann, his boss and the former CEO of Deutsche Bank. After Wauthier took his own life last week Ackermann promptly resigned as Zurich’s chairman, saying it was because Wauthier’s family was blaming him—an explanation that seemed dubious to some. Now, various reports published over the last 24 hours have revealed a troubled relationship between the two men. […]

    The CFO’s body was discovered by police on Monday, August 26, when he didn’t show up for work. According to the Wall Street Journal, Ackermann called a meeting of Zurich’s board of directors the next day. During the meeting, he read Wauthier’s suicide note, which repeatedly heaped blame on Ackermann and his tough management style. Ackermann was apparently deeply affected, and wouldn’t respond to directors’ phone calls after the meeting adjourned.

    When the meeting commenced the next afternoon, Ackermann dropped a bombshell: he announced his resignation, effective immediately.

      Image cannot be displayed

    (Pierre on the left, Herr JosefA on the right)

    Think of it this way, as a matter of perspective – JamieD resigns from the top dog spot at JPM to enjoy his spoils of war, and to take the ‘golf-intensive’ job of replacing aging Uncle Warren as the head of Berkshire Hathaway. Two years later, instead of resigning in protest (and taking an even-better option at another financial powerhouse), the CFO of the latter company commits suicide and scrawls a dying condemnation of the top bankster in his own blood.

    Is it just ME that thinks this is EXTREMELY unusual for Swiss financial circles? That there may be more behind this tragedy of avoidable, violent catharsis presumably stemming from gargantuan hubris on the part of Uncle Josef? A true moral conflict on the part of Pierre coming out of the realization of what he had done (presumably under the direction/pressure of JosefA)? Bankster infighting collateral damage, aimed at removing JosefA much as DSK was publicly drawn-and-quartered – and Pierre was a mere bishop sacrificed to checkmate the King (aka guided-projectile Arkancide)?

    About the Author


    Sep 8, 2013 - 3:09pm

    No annoyance my end Fool

    just amusement. You remind me of a golf ball sitting up proud on a tee, asking for it.

      Image cannot be displayed

    Motley Fool
    Sep 8, 2013 - 1:44pm


    A silly question deserves a silly answer, so I will go with ...

    I am here purely to annoy You.

    Sep 8, 2013 - 12:05pm


    are you still here? still trying to make friends and influence people?!

    Motley Fool
    Sep 8, 2013 - 4:09am



    I'll pencil in 6th feb and 4th april for amusement value. :)

    Sep 8, 2013 - 3:25am

    Boogie shoes

    First of all, that's 10 points for using "take a powder" in a sentence, in context; 5 points for using "boogie shoes" in a sentence, in context, but doggone, you got the 50 point bonus for using both in the same sentence!

    Hah! yet again, sir. I have used the term 'boogie shoes' maybe twice in my life in spoken conversation, and truthfully must have subconsciously been WAITING for an opportunity to create such a sentence. The other funny thing is that these phrases have come into my vocabulary solely from a single book by Stephen King, whose work (despite the fluctuation of its excellence) is vastly better and more thought-provoking than he is often given credit for.

    Travel restriction would indeed be the death knell of anything resembling an economy (beyond other complications), and is therefore undesirable due to its interference with the shearing, errr.... maintenance of living standards and job security of taxpaying public. However, seeing the nature of the catalytic event being discussed, far-towards-the-edge-of-spectrum options seem definitely on the table these days. Denying movement to anything but a token minority of denizens would hardly be a change in current affairs, capital controls are already all around us. Removing oneself (esp. WITH one's wealth) could prove to become tricky at some point. But I completely agree, where there's a will (and possibly also some coin) there's a way. The Snowden affair shows how EASY it seems to be to deny individual freedom of movement to those with only a single blue passport.

    OT, but I am curious to see how rapidly the Polish (and Irish, Hungarian, and Cypriot, and to some arguable extend Greek) example of outright nationalization of private pension funds will become official, explicit EU policy for the second-tier members -- then ALL members. This is something Germans, for example, have been worried about for a better part of the last DECADE (well, the unsustainability of the solvency of their SS fund, anyway) . I did not comment much on Sinclair's GOTS calls because I thought it an obvious point. But how tremendously funny (in an insane, bloodsot-eyes-and-drooling kind of way) would it be if the ECB and Federal Reserve (better yet joined by the IMF and BIS) announced a coordinated, joint effort to revise monetary policy in the interest of stabilizing sovereign debt markets by recommending that retirement funds, pensions public and private be REQUIRED by law to hold said sovereign notes in overwhelming weight or their entirety, for the protection of the taxpaying public worldwide -- along with the global economy. Or could they do so simply by using their existing regulatory authority?

    Now if only there were an opportune moment, a crisis large enough to warrant a response so bold, so far-reaching and wise in its benevolence... Though I don't know whether this would be any better than simply outright monetizing the debt by buying directly, nor whether the presumable decline in stock values due to the simple abundance of shares being sold would be an acceptable price.

    Sep 7, 2013 - 6:38pm


    Once again, this is NOT A PREDICTION, much less a recommendation. It's a question: is there any realistic mechanism by which the factors & market participant actions taken in the 2004-2009 timeframe could SOMEHOW have a direct effect on current gold prices (on a day-by-day basis), at this late date. And if so how.

    Yes, I was looking through some algo trading book I have and got this: “Time series momentum of a price series means that past returns are positively correlated with future returns.”.

    Also if you wanted to test for causality here is a paper describing how to do it with a granger causality test, there are other better ways but they are more complicated. If you know how to write code or want to learn I'd do that, then you could use other more complicated algorithms others have already wrote for you to test for causality, I'd use the R language (or python but R would be easier if you've never coded before).

    Sep 7, 2013 - 4:35pm

    Egypt army hits Sinai militants

    Egypt army hits Sinai militants, at least 30 killed, injured: sources

      Image cannot be displayed

    CAIRO | Sat Sep 7, 2013 1:11pm EDT

    CAIRO (Reuters) - The Egyptian army mounted a major operation against Islamist militants in North Sinai on Saturday, killing or wounding at least 30 people, security officials said.

    Dozens of armored vehicles backed by attack helicopters took part in the operation near Sheikh Zuweid, a few kilometers (miles) from the Palestinian Gaza Strip. Fifteen people were detained in the operation, which the officials said targeted militants responsible for attacks on the security forces.

    The operation comes two days after an unsuccessful attempt to assassinate Interior Minister Mohamed Ibrahim in Cairo. Security officials say the militants behind the suicide bombing were linked to groups in the Sinai.

    Hardline groups have expanded into a security vacuum that opened up in North Sinai after the downfall of veteran autocrat Hosni Mubarak in 2011.

    Their attacks have escalated since July 3, when the military deposed president Mohamed Mursi of the Muslim Brotherhood, with almost daily assaults on the security forces and other targets in the desert peninsula bordering Israel.

    Sep 7, 2013 - 4:16pm

    @Captain Fool

    There is no prediction, per se. GOFO can go negative, while physical gold price <0 in $ means $ is dead. Contracts promising delivery at a later date may go to, but still not below, zero.

    You can find the dates yourself in the LBMA tables for the desired maturities if your wish, but the two tops in the blended average GOFAUX were on Jul. 22 and Sept. 25, 2008.

    The dates that are approx. 1358 weekdays later (not accounting for trading holidays) are: Dec. 4, 2013 and Feb. 6, 2014, respectively.

    The low point on the graph shown corresponds to Nov. 21, 2008 (theoretically, it would go into the sub-zero area later, 4.5 yrs from last month). The 1358 day shift puts that at Apr. 4, 2014.

    Once again, this is NOT A PREDICTION, much less a recommendation. It's a question: is there any realistic mechanism by which the factors & market participant actions taken in the 2004-2009 timeframe could SOMEHOW have a direct effect on current gold prices (on a day-by-day basis), at this late date. And if so how.

    But feel free to be on the lookout, if you wish.

    Visit the FAQ page to learn how to track your last read comment, add images, embed videos, tweets, and animated gifs, and more.

    Sep 7, 2013 - 3:26pm

    @ Monetary_Lapse

    Thanks, looks like I was backwards. In fact, if you just took the complete opposite of what I said then I would be almost correct, ha. I mistook leasing rates (which depend on credit of lender) and swap rates which use GOFO.

    I'm not sure why the arbitrageurs are not stepping in, maybe the backwardation isn't a large enough profit yet, maybe they are scared of future delivery, who knows. The backwardation has been pretty small from what I've seen, I keeps a close eye on the futures prices most days, I'm not sure what it would take to be profitable. Also I don't see why the arbitrageurs would have to sell physical, why not buy and sell different contract months.

    From article below (which I found really good, even points out my mistake of confusing swaps and leases), it points out some reasons for low GOFO rates. - Asian demand and their demand of different types of bars than west uses. - Manufacturers supplying Asia are both buying and lending since they don't want to miss demand surge. - Also asian demand it is taking metals out of the wests large investment houses which also currently do the lending. These investment houses have been unloading their massive gold holding since 2011 peak. - Hedge funds and other speculators using swaps and leases to sell physical for cash has also surged (borrowing gold from the lenders). Apparently they don't borrow at the top and borrow at the bottom, they are backwards. So seems to be a couple of reasons for GOFO going negative, from physical demand (to both buy and sell) to main lender unloading positions, to manufacturers being forced to borrow metals due to different bar type China uses. Greater number of borrowers and less supply to lend, so seems physical supply issue. I wonder how much more the hedge funds shorted using comex rather than swaps/leases, those swaps/leases are going to require physical returned to the lender.
    gold slut
    Sep 7, 2013 - 1:59pm

    @ Motley Fool

    Wow, your name and avatar changed before my very eyes! So now you are Captain Obvious.

    I always knew you were a bit of a schizo......

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