A few months ago, I played around a bit with the GOFO numbers from our good friends at the LBMA. When looking at the longest timeframe available from the bullion association, the thing that strikes me is that there seem to have been only a few instances of extreme volatility in the GOFO rates – and the recent period (the unprecedented lengths of recent negative GOFO periods notwithstanding) appears almost CALM.
Well, changes in GOFO are closely tied to the cost of holding USD/expected profits from holding USD. The ‘flatline’ from 2008 onwards is a reflection of ZIRP and QE. But if we look at the data from a daily rate of change viewpoint, a substantially different picture emerges.
If you are interested in reading up on the events of September, 1999, there are a number of easily available sources: 9/26/99 -- Washington Agreement on Gold
Now, if any readers should know of good research that tells what REALLY took place and what it meant, please share. I really have to get around to reading Ferdinand Lips.
Zooming in on the last five years:
The relative magnitude of GOFO volatility that was happening during the meltdown of 2008 seems to be an almost monthly/weekly occurrence since May 2013.
The recent bouts of negative GOFO are highlighted below.
Now, granted – the levels of daily volatility are due to the fact that as the rates are zero-bound, the actual percentage that GOFO represents is very small. If a rate is at two basis points, a hike to 5 basis points represents a 250% jump. And of course any negative GOFO period begins with a sharp drop below 0%, and ends with a rapid spike up above into positive territory.
BUT THEN WHY WAS THIS NEVER THE CASE IN THE LAST 5 YEARS, WHEN GOFO WAS ALREADY HOVERING BETWEEN 0% and 0.5%?
Perhaps negative GOFO has no real significance, and is not a causal factor in the discovery of fair market pricing for gold that we have through the wonderfully efficient and transparent global bullion and bullion derivative markets… Everything is fine and well, please ignore the explicit incentive for a rational market actor to hold gold instead of cash present in the marketplace (with ever increasing frequency). This once-rare event is now a regular daily occurrence, we have all gotten used to it by now, nothing to see here, move along…
As always, there is never a smoking gun, a single absolutely positive indicator that the system is irretrievably broken. But this can perhaps be counted as another bone-dry straw in the tinderbox. A tinderbox that seems to be very intent on finding (or creating) itself a good, solid spark.
PS: For purely entertainment purposes, here is an updated chart of the GOFOAUX (five years earlier) vs. AUX (now). The correlation remains high at 0.85. Bear in mind, there is NO explanation for why the shapes of the charts are or should be similar -- think of it as discerning animal shapes in clouds. GOFOAUX = per-ounce cost of borrowing gold on a swap basis against USD