Mystery Theater: GOFAUX artifacts and Germanic bankster tragedy

72
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:

The longer-term picture looks thus:

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™

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.

    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.

    (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

      72 Comments

    Motley Fool
    Sep 6, 2013 - 4:17pm

    one ^^

    Nice charts.

    Remember that correlation does not equate to causation.

    I recall there was an economist that found a perfect correlation between weather patterns in some Indian province and corn(?) prices traded on an American exchange.

    Floyd1
    Sep 6, 2013 - 4:45pm

    (No subject)

    Frank Zappa: Son of Orange County + More Trouble Every Day
    Sep 6, 2013 - 4:46pm

    It's always good to see constructive input

    Indeed, correlation is NOT causation. But would it not make sense to start looking for causation in things that DO correlate, before moving on to examine un-correlated events and metrics?

    "One of the most persistent untested maxims in the statistical sciences is "correlation does not imply causation". This adage is taught widely to students and practitioners, in order to prevent the logical fallacy of cum hoc ergo propter hoc ("with this, therefore because of this"). In short, it is the idea that a simple statistical correlation between factors is not sufficient to infer that a causal relationship exists. The argument is that such a result may be interesting but at best indicates further research is warranted before causality may be claimed. As Edward Tufte explains "Correlation is not causation but it sure is a hint. "

    This study examines this maxim through a rigorous meta-analysis of scientific articles published in Science, Nature and other leading journals, from 1970 to 2005 (see Appendix A). [...] From the 7,234 articles in the catchment, 655 were selected for this study." -- Gregory Hill, presumably another dope with a spreadsheet

    To reiterate (for those who missed the overwhelming abundance of prior clues to this effect) -- this is most definitely an UNtested hypothesis. The request is for supporting and contradicting arguments, not a restatement of the fact that it is UNtested, and the fact that it IS a hypothesis:

    hy·poth·e·sis

    noun \hī-ˈpä-thə-səs\ plural hy·poth·e·ses

    Definition of HYPOTHESIS

    1 a : an assumption or concession made for the sake of argument b : an interpretation of a practical situation or condition taken as the ground for action 2 : a tentative assumption made in order to draw out and test its logical or empirical consequences 3 : the antecedent clause of a conditional statement
    SilverSurfers
    Sep 6, 2013 - 4:46pm

    4th

    for a top tenner, with artifacts and germanic banksters, freakin-A,

    The Incredible Melting Nazi
    Video unavailable
    Indiana Jones and the shoot of death

    GO BAMA!! Here's a correlation:

    USA Victimless Crimes against Humanity

    transplanted baby
    Sep 6, 2013 - 4:47pm

    Fifth!

    just because I saw the chance

    Be Prepared
    Sep 6, 2013 - 4:49pm

    @JY - Thought provoking...

    I like your invention of the GOFOAUX and it is interesting to see the offset shift compared to the PM fix of about 5 years. I wonder how the leverage component of the gold leasing program comes into play. Unfortunately, we don't really have a great handle of the leverage variation either up or down of the contracts over that same period. Ultimately, it may have no direct impact or could be intrinsically accounted for in the GOFOAUX since its historically representative. The only that might skew the correlation is if the carry forward of unreported gold swap agreements exceed the reported agreements in great magnitudes.

    It seems, based upon your chart, we could see a crash in the price of Gold by Jan 2014 if the correlation maintains its 90% rate. Hopefully, though, it will break the trend or it will be another great acquisition moment. Appreciate all the hard work... will continue pondering all the information!

    ¤
    Sep 6, 2013 - 4:56pm

    Nice charts...

    Thanks JY, that was interesting.

    Btw...6th!

    bullion only ¤
    Sep 6, 2013 - 5:06pm

    Seems like 2015 is coming up

    Seems like 2015 is coming up on so many seemingly unrelated ways that the perfect storm is certainly brewing.

    It will be a doozie.

    RT

    Nana
    Sep 6, 2013 - 5:10pm

    I Don't Trade

    However to me the London "Fix" is just that, a "Fix". Why isn't this illegal?

    chrtoo
    Sep 6, 2013 - 5:14pm

    Yes, great chart work.

    So many ways to spin the data into information. Nice job of that, here.

    CHR.

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