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:

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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™

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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


    Motley Fool
    Sep 7, 2013 - 1:45pm

    A question

    What's the predicted date for that top(roughly), just before the drop to zero, so I can pencil it in on my calendar. Also what is the date for that bottom, and how many days inbetween?

    Gold Dog
    Sep 7, 2013 - 1:29pm

    Thanks JY!

    If your chart is accurate, it just confirms my theory that the best course of action is "wiggly-waggly straight ahead".

    Half my assets in tangibles and half in cash in case deflation shows up.<---Cash will be king during a 90% off sale of everything in the world.

    For your viewing pleasure and timely just now;

    Video unavailable
    Jim Hrtabit
    Sep 7, 2013 - 1:16pm

    On the meaning of negative GOFO

    Turk: “The big news here in London, Eric, is that gold slipped into backwardation once again. The previous backwardation ended here in London on Monday, when the US was closed for a holiday. It looked like a concerted effort by the central planners to put gold and dollar interest rates back into their normal relationship....

    Turk: “The big news here in London, Eric, is that gold slipped into backwardation once again. The previous backwardation ended here in London on Monday, when the US was closed for a holiday. It looked like a concerted effort by the central planners to put gold and dollar interest rates back into their normal relationship....

    During each of those two previous periods, gold was in backwardation for just a few days. In contrast, the backwardation that ended Monday prevailed for a totally unprecedented and record breaking 40 trading days. During that time, gold rose from $1,200 to over $1,430. It was a spectacular jump in price. But with gold again below $1,400, the backwardation has re-appeared.

    Where are the arbitrageurs? Why haven't they stepped in to take the easy profits? All they have to do, Eric, is sell their physical metal and simultaneously buy it back for future delivery at a cheaper price. Plus, they have use of the proceeds from their sale to invest. They also avoid storage costs while they own paper gold - a promise to pay gold in the future - instead of physical metal. For the big gold players it is easy money laying right there on the table, in plain sight for everyone to see. So why don't the big players take the advantage of the arbitrage?

    Is it because they fear the promise to deliver physical gold to them in the future will be broken? Do they value a tangible asset more highly than a financial asset? Do they believe the reward for holding physical metal is greater than the potential of a short-term profit?

    We of course do not know the answer to these questions, but one thing is clear, this new backwardation illustrates that physical metal remains scarce, or in other words, it is being held in strong hands. It is therefore going take much higher gold prices to entice these strong hands to part with their metal and instead hold some depreciating national currency.
    The best primer that I know of on negative GOFO comes from Dave Kranzler, who writes as Dave from Denver;
    I 've been writing about the significance of the negative gold/dollar swap rates, otherwise known as the Gold Forward (GOFO) rates, published daily in London by the LBMA (London Bullion Marketing Association. Unfortunately, the signficance of the negative GOFO rates are lost on most people. a month ago I wrote an article that discussed the significance of the negative gold forward interest rate (GOFO) that was being observed in London and is published by the London Bullion Market Association (LBMA). The GOFO is the interest rate charged for a dollar/gold swap, which is when someone who owns gold needs a short term dollar loan and he collateralizes the loan with his gold. When the rate is negative, it means that someone wants his gold more than he wants to borrow dollars and it signifies an extreme shortage in physical gold that can be immediately delivered to large buyers who are forcing the issue of delivery and it is another form of "backwardation."

    I wrote an update for Seeking Alpha because the GOFO rate has been negative now for a historically unprecedented 28 days. You can read the article here: Update On The Negative GOFO: Gold Has Bottomed

    The only conclusion that can be drawn from this situation is that the bullion banks in London are scrambling to find physical gold that can be delivered into the massive demand coming from Asia, specifically China. I also believe that the duration and severity of the negative GOFO will translate directly intoa commensurate move higher in gold that will shock everyone.
    Sep 7, 2013 - 12:09pm

    @ Monetary_Lapse_

    Am I backwards here about GOFO? I see the opposite of what you say regarding yield, but I don't know much about GOFO. Let's say I have some gold that I want to lease out, the higher the GOFO rates the greater the yield I'm going to get. I'm like a bank making a loan, I want the highest interest rates possible. I see GOFO rates similar to interest rates on a dollar loan except you're loaning gold instead of dollars. So I guess negative lease rates means gold owners are paying people to borrow their gold, I'm not sure why this would happen, only thing I can think of is maybe even though they are negative the cost to store the gold is still cheaper than what they are paying for others to borrow it. So if there is physical tightness in the market, there is less gold to lease out, the lease rates would rise because there is less gold to be leased, assuming the demand to lease remains constant. Where have I gone wrong here?

    I also think low lease rates is bullish, I just don't think it is because of physical supply tightness. Everyone that leases gold hopes the price drops from the time the contract starts to the time the contract expires. People that lease gold are using it, so when the contract expires they need to buy gold back and return it to the person they leased it from, they obviously want that price lower. Now what if some of the people that normally lease gold, look at the price and come to the conclusion that it's a bigger risk to lease gold for a year than to just buy the gold outright here and now. That is for people like jewelry makers or whatever that lease the gold with the intentions of creating a product with it, and if this happened it may cause physical tightness but I don't think the chances are that great because they were going to use that gold either way, it was coming off the market. Now there is another group of people that lease gold and sell it into the market outright, they plan on taking that cash gained from the leased gold sale and investing it until the contract is up and they buy the gold back from the market with the hopes that their investment gains are greater than gold price change and amount charged from GOFO rates. What I think is happening is that this last group of people (some of them anyway) that lease gold with plans of selling it onto the market, have decided it's to risky an investment strategy and stopped leasing gold. Now we have a situation where the amount of gold available to be leased has remained constant (assumption of course), but the amount of people willing to lease the gold has dropped, creating greater gold lease supply to be leased than demand causing the GOFO rates to drop along with it. I consider this bullish because the people with the most knowledge of the workings of the gold market have deemed it to risky for their sell gold to the market investment strategy.

    Anyway, I haven't seen anywhere the logic of how low GOFO rates are a sign of physical stress, if anyone has a link I'd appreciate it.

    Sep 7, 2013 - 12:08pm

    Saturday News Blast: World

      Image cannot be displayed

    Weak Syria Strike Better than None - Frederick Kagan, Washington Post
    The Pentagon's Shocking Expansion into Africa - Nick Turse, TomDispatch
    For Israel, a U.S. Strike Is a No-Brainer - Daniel Nisman, New York Times
    Israel's Aim for Syria: Everyone Lose - Patrick Cockburn, The Independent
    Abbott in a Cage of His Own Making - Peter Hartcher, SM Herald
    UK & U.S.: Clueless & Rightfully Nervous - Charles Moore, Telegraph
    Australia Will Elect a Liar - Mike Carlton, Canberra Times
    The Implosion of Australia's Labor Party - Jeff Sparrow, The Guardian
    Could U.S. Bombs Bridge the Sunni-Shia Divide? - Marc Lynch, FP
    Obama Should Go to Congress Now -- For Iran - Alan Dershowitz, Haaretz
    Germany's Economic Miracle May Just Be Over - Sebastian Dullien, FT
    How Miners Are Robbing Australia - Seccombe & Blumer, The Global Mail
    Obama's Credibility On the Line, Not America's - Anna Simons, TNI
    Why Russia Hates Gays - Michael Bohm, Moscow Times
    Canada's Prison Secret - Angela Hennessy, Vice

    A Cuban Missile Crisis in the Mideast -- Right Now - The Daily Star
    Australia's Very Future Is at Stake - Sydney Morning Herald
    A Conservative Victory in Australia - The Spectator
    Putin: Britain Is a Small Island No One Listens To - Daily Telegraph

    The Muddle East - Reuel Marc Gerecht, Weekly Standard
    Bush's Iraq Disaster Looms Large Over Syria - Timothy Egan, NY Times
    Don't Blame Bush for Obama's Syria Mess - William McGurn, New York Post
    A Stand for Syria -- and Obama - Michael Gerson, Washington Post
    Why America Is Saying 'No' - Peggy Noonan, Wall Street Journal
    Putin Plays Stubborn Host at G-20 - Schepp & Volkery, Der Spiegel
    Russia and U.S. Must Settle Old Scores - Alan Philps, The National
    There's No One Left to Enforce Global Rules - Philip Stephens, FT
    Why Is Prosperous China So Anxious? - Orville Schell, Yale Global
    Every American President Is A Hawk - Frank Harvey, National Post
    The Rise of the Antiwar Libertarians - Nick Gillespie, The Daily Beast
    Syria Isn't Obama's Litmus Test on Iran - Jeffrey Goldberg, Bloomberg
    Tony Abbott Poised for Victory in Australia - Lenore Taylor, The Guardian
    Xi: China's Strongman in the Making? - Gordon Chang, World Affairs
    Is China Occupying 640 km of Indian Territory? - Zachary Keck, Diplomat

    Obama, It's Time to Return Your Peace Prize - Kirsten Powers, Daily Beast
    Would Bombing Syria Be a 'Just War'? - Robert George, Hoover Institution
    The Moral Follies of Humanitarian Warfare - Kim Holmes, TNI
    What Makes U.S. So Prone to Intervention? - Noah Berlatsky, The Atlantic
    Putin Overwhelms Obama at Summit - Leonid Bershidsky, Bloomberg
    How Russia Botched an Entire Century - Alexei Bayer, The Globalist
    Russian Dissidents Sour on Obama - Anna Nemtsova, Foreign Policy
    Sarkozy Is Right: Obama's Not a Leader - Nile Gardiner, Daily Telegraph
    Fears for Future of Women in Afghanistan - Nilanjana Bhowmick, Time
    Egypt and Its Patrons - Paul Mutter, The Arabist
    Ahmadinejad Cooked Iran's Economic Books - Jamsheed Choksy, Forbes
    Is China's Corruption Crackdown for Real? - Jill Levine, Tea Leaf Nation

    garimpieroMr. Fix
    Sep 7, 2013 - 11:49am

    Gold and Keynesianism ( i.e., anti-gold)

    Why anyone refers to what is happening today as "the great Keynesian experiment" is beyond me- if a vampire were sitting on your shoulder sucking your blood, or a guy you had just watched printing $20's in his basement paying you with them would anyone describe it as an "experiment"? There is a reason that a gold standard- you could as well make it a copper standard or a lead standard- existed, and that was because the Keynesians existing since the Yuan (!) Dynasty introduced fiat paper money could not be trusted. The eurozone was based on the promise that no country would run over a 3% deficit- that went over well. A return to an honest system of money would be as simple as making the so called security thread in money gold, silver, or an alloy of same. But that would not satisfy the Lilliputians, the Banana Republicans, and the Satanists of the world.

    Key Economic Events Week of 5/10

    5/11 10:00 ET JOLTS job openings
    5/11 12:00 ET Goon Brainard
    5/12 8:30 ET Consumer Price Index
    5/12 9:00 ET Goon Chlamydia
    5/12 2:00 ET Federal Budget
    5/13 8:30 ET Producer Price Index
    5/14 8:30 ET Retail Sales
    5/14 8:30 ET Import Price Index
    5/14 9:15 ET Cap Ute & Ind Prod
    5/14 10:00 ET Consumer Sentiment

    Jim H
    Sep 7, 2013 - 10:22am

    negative GOFO means that Gold has a yield, more than dollars

    I view this piece much less positively than most of the peanut gallery here. One of the oldest adages used against Gold as an investment is that it, "does not yield". It is just a lump of metal sitting there. To see that Gold is now yielding, to ANY extent, is a sign of stress in the market. To argue that it is not is simply an effort to push the concept of negative GOFO off your radar, and in to your new normalcy bias. The more that TPTB can convince you that things like $85B (or more!) of monthly QE, and negative GOFO, are normal... the less chance that you or anyone else will panic and start buying Gold.

    Sep 7, 2013 - 10:05am

    rtabit: Welcome to the world


    Welcome to the world of Academia. He said "a paper", not causation or even correlation.

    Some people publish a paper every time they take a dump. The fruits of the "publish or perish" model.

    Sep 7, 2013 - 9:36am


    r=0.91 is as close to certainty as is likely to get...

    I disagree, it is significant but it's not as close a likely to get, and it's not really uncommon when dealing with stock price series. Here is a list of funds in relation to SPY, must be at least 50 greater than .9, and if you compared all those funds for correlation with other funds it'd get into the thousands. Now this is just for 6 month time span, and is comparing separate time series, but my point is stock time series tend to have high correlation with each other and maybe with themselves, not sure but that'd be my guess. But maybe they don't, I'm just trying to point out that .9 is not as uncommon in stock time series as you might think.

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    Key Economic Events Week of 5/10

    5/11 10:00 ET JOLTS job openings
    5/11 12:00 ET Goon Brainard
    5/12 8:30 ET Consumer Price Index
    5/12 9:00 ET Goon Chlamydia
    5/12 2:00 ET Federal Budget
    5/13 8:30 ET Producer Price Index
    5/14 8:30 ET Retail Sales
    5/14 8:30 ET Import Price Index
    5/14 9:15 ET Cap Ute & Ind Prod
    5/14 10:00 ET Consumer Sentiment

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