Negative GOFO and Rising Gold Prices

305
Sat, Mar 1, 2014 - 12:50pm

Have you ever had one of those thoughts tumbling around in your head for days? Usually, it lingers there until you finally try to put the pieces together. This happened to me yesterday and the result is something that needs to be widely shared, thus this public thread.

As most are aware, the LBMA publishes Gold Forward Offered Rates (GOFO) every day. You can find all daily updates and 25 years of GOFO history by clicking this link: https://www.lbma.org.uk/pages/?page_id=55&title=gold_forwards

Our friend, Denver Dave, published a concise, easy-to-understand explanation of GOFO back in July. I encourage you to read it before you go further but, in summary, it goes something like this:

Positive GOFO is the historical norm. Negative GOFO, when it appears, means that physical gold is preferable to dollars and, thus, indicative of a shortage or supply squeeze.

https://truthingold.blogspot.com/2013/07/gofo-explained-and-why-its-now-...

I would take this this one step further. In the 45 years since the collapse of The London Gold Pool, Central Banks have stood ready to lease gold to the Bullion Banks. The Bullion Banks, in turn, take this leased gold, leverage it through paper derivatives and dump it onto the futures markets in order to suppress and manage price. The Central Bank willingness to lease their gold was apparent through the persistently positive GOFO rates. In fact, from 1989 to mid-2013, GOFO rates were negative for just seven days.

September 29 and 30, 1999

March 9 and March 12, 2001

November 20, 21 and 24, 2008

That's it! Seven days out of about 5,000 or 0.14% of the time.

However, I think we can all agree that things have been fundamentally changing in the gold market. Against most expectations, price collapsed from $1800 to $1180 between 10/1/12 and 6/28/13. This manufactured price drop only served to exacerbate the extreme levels of demand that have been seen since 2010, particularly from China. So it came as no surprise that on July 8, 2013, just five market days after The Price Bottom was reached, GOFO rates turned negative. This time, however, rates did not flip back to positive after two or three days. Instead, rates stayed negative for 40 days.

Yep, you read that right. After only being negative for 7 of the previous 5,000 days, GOFO went negative for 40, consecutive market days from July 8, 2013 to September 2, 2013. And what happened to price during that time?

On Friday, July 5, price closed at $1213 and GOFO went negative in the morning of Monday, July 8. After rallying through July and August, price peaked on Wednesday, August 28 at $1433. That's a move of $220 or 18%. Not coincidentally, GOFO rates "bottomed" on August 22 and flipped back to positive on September 2. Price began to move sharply lower and, by September 18, had fallen as low as $1308. Though there was a brief period of flat rates in mid-September, GOFO rates remained positive until October 16, 2013.

In the time since, GOFO rates have vacillated between positive and negative, roughly coinciding with Comex delivery months. In short, if The Comex is in a delivery month like October, December or February, GOFO is likely to be negative. If it's not a delivery month, like September, November or January, GOFO will likely flip back to positive. It looks like this:

July 8, 2013 - GOFO moves negative

September 2, 2103 - GOFO moves back to positive

October 16, 2013 - GOFO negative

November 6, 2013 - GOFO positive

December 9, 2013 - GOFO negative

December 12, 2013 - GOFO positive

December 18, 2013 - GOFO negative

January 16, 2014 - GOFO positive

February 4, 2014 - GOFO negative

March 3, 2014 - I expect GOFO to be positive again on Monday. See the recent trend below:

21-Feb-14 -0.05400 -0.03600 -0.01000 0.03400 0.11200
24-Feb-14 -0.05000 -0.03400 -0.01200 0.03200 0.11200
25-Feb-14 -0.04600 -0.03000 -0.01200 0.03400 0.11400
26-Feb-14 -0.03800 -0.02400 -0.00600 0.03200 0.11400
27-Feb-14 -0.02400 -0.01400 0.00200 0.03400 0.11600
28-Feb-14 -0.01400 0.00000 0.01600 0.04800 0.12400

Let's cut to the chase. Here's what I think...

The days of Central Bank gold leasing are almost over. Whether the CBs are "out" of gold or simply unwilling to lease what they have left for fear of not getting it back (from China), the CBs are not playing the gold leasing game like they have for the past 45 years. Again, for the past 24 years, GOFO rates were negative just 7 out of 5,000 days. Since July 8, 2013, GOFO rates have been negative for 98 out of 164 days or roughly 60% of the time.

Put another way, positive GOFO means "business as usual". Central Banks are willing to lease gold to the Bullion Banks. The BBs take this gold and dump it onto the futures market, using this scheme to contain, manage and suppress price. This worked perfectly until 2003 when demand and fundamentals overwhelmed this scheme for the next nine years and price rallied from $300 to $1900. Leased gold was continually dumped from October 2012 until late June 2013 and the resulting decline took gold back from $1800 to less than $1200.

But, now, negative GOFO is the new norm. Why? Because the CBs no longer have the gold to lease to the BBs. Without this readily available physical supply, the BBs are unable to aggressively manage price on a day-to-day basis and they are forced to stand down. Instead of daily 7:00 am London time price raids, we only get one per week. Instead of "waterfall" declines on the Comex, we get gradual and steady price increases.

All of this would just be theory if there wasn't price data to back it up and this is the point where the pieces began to fall into place for me yesterday. Please take a moment to ponder the chart below. It shows the last 12 months of daily price action. All of the price change on the left side of the chart, up to the first red arrow, occurs in a period of consistently positive GOFO. Look at the price action since July 8, when GOFO first flipped negative and then look at all the other arrows. Red arrows point to dates where GOFO flipped negative. Black arrows point to dates where GOFO flipped back to positive. (click the chart to expand)

Do you see a trend here? Isn't it quite clear that when GOFO is negative, prices generally rise and when GOFO is positive, prices generally fall? Here, let me make it easier for you...Longtime Turdite "Pining" added some color and number to the chart. Now take a look. What do you see?

And here is where I think we are onto something. Let me explain...no, there is too much...let me sum up:

  • Extraordinary global demand (China, German gold repatriation, etc) has made the supply of readily-available and deliverable gold extremely tight.
  • Central Banks are no longer willing to lease gold into the market every single day OR
  • The CBs do still lease every day BUT, during Comex delivery months, the extra physical demand is just enough to tip the scales out of balance and drive GOFO negative.
  • Negative GOFO indicates a shortage of London Good Delivery Bars for leasing and delivery.
  • A shortage of bars precludes the BBs from heavily shorting and driving price lower.
  • This leaves us with this conclusion for traders and stackers everywhere:

    Buy when GOFO is negative. Be cautious, sell or hold off on new purchases, when GOFO is positive.

    Could it be as simple as that? Yes! It may very well be, at least for now. Rest assured, I'll be following this trend very closely in the weeks and months ahead. Be sure to join us in The Vault every day for complete coverage, analysis and updates.

    TF

    About the Author

    Founder
    turd [at] tfmetalsreport [dot] com ()

      305 Comments

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    I Run Bartertown
    Mar 3, 2014 - 8:53pm
    buzlightening
    Mar 3, 2014 - 8:48pm

    IVARS

    Remember every dip being bought. We are now in every market rally being sold.

    buzlightening
    Mar 3, 2014 - 8:38pm

    Can't dig up the passed to save our future.

    All history is concrete. Waste of heart beats and energy to squabble, contend, or divide ourselves over who started all the gov goon platooning corruption with banksters. It's all concrete the passed. You want to wear yourselves out on jack hammering up the passed have at it. The future is nothing but wet concrete. Those who realize this, forget the passed and make plans to adapt; unite with like minded people will shape the future of the free constitutional republic. Those who don't will break themselves upon the rocks; concrete of the passed. We can return to this: E pluribus unum Latin for "Out of many, one" (alternatively translated as "One out of many" or "One from many")—is a phrase on the Seal of the United States.

    UNITED WE STAND IN TIME AND FOREVER! SO HELP US GOD!

    buzlightening
    Mar 3, 2014 - 8:25pm

    Russia & China in lock step.

    Whatever the catalyst for the mkt crashcading to begin it was always there. UKraine part of it, tipping point. Yet it's all there, so much in so many massive dead broke debt suffocating sovereign nations, drowning in western bankster fraudsters tsunami of global bonzi's is the greater part of it. The UKraine plug pulled for cover. There's no good end to the US challenge of UKraine. Won't go western, no never; as Russia sweeps in to secure every part of it necessary for economic survival. China backing Russia all the way. Who will get more isolated and floundering more into the depth of banana republic nation? US! It's an obvious URaine. Russia fire & raine! China; lightening & thunder upon US! Financially this nations the BRICS, and all with eastern alliances ready to pull the plug on US. Right the lil scamBO regime wil save US. Certainly complicit in planning the demise of US! Check your underwear drawers for kevlar long johns. It's a real shit storm arriving inthe US; ultra repeating epic proportions of pain, suffering, and mourning. When the wicked rule the people mourn!

    benque
    Mar 3, 2014 - 7:35pm

    By the way USA

    Thank you sincerely for coming swiftly to the aid of a fire-damaged Canadian naval vessel in the Pacific!

    Despite our pokes and jibes, we are the very best of friends at the regular folks level.

    benque
    Mar 3, 2014 - 7:06pm

    "Kanadian"

    Is that like "Kardashian"? Oh, wait, it isn't. "Kardashian" is exclusive to that country underneath the 49th parrallel.

    In other news, jeepers its cold here for March 03. Trying to extract silver equivalent BTUs from a maple, but it won't ignite.

    Key Economic Events Week of 7/13

    7/13 11:30 ET Goon Williams speech
    7/13 1:00 ET Goon Kaplan speech
    7/14 8:30 ET CPI for June
    7/14 2:30 ET Goon Bullard speech
    7/15 8:30 ET Empire State and Import Price Idx
    7/15 9:15 ET Cap Ute and Ind Prod
    7/16 8:30 ET Retail Sales and Philly Fed
    7/16 11:00 ET Goon Williams again
    7/17 8:30 ET Housing Starts and Permits

    benque
    Mar 3, 2014 - 6:49pm

    Newsflash:

    Foreign devils win precious metals of the most coveted variety by defeating local angels in both women's and men's hockey, during 2014 winter olympics.

    Angels vow to get revenge by razing olympic host country through economic warfare, using brainless haircut and B52 loads of paper promises.

    boomer sooner
    Mar 3, 2014 - 6:27pm

    If we have to support the

    If we have to support the Ukraine govt, which do we support? The one that was elected or the one that pushed its way in. I have no official dog in this fight, yet, but just curious. Officially, I would have to say the former (holding nose). A solution would be to invite all the bankers and their .gov buddies involved to the 33rd floor of the JPM building in London.

    AlienEyesDagney Taggart
    Mar 3, 2014 - 5:33pm

    LOL

    Technically Dagney, as a Kanadian, you are a "foreign devil" as well.

    Reagan was not driving when the "debt train" jumped the track and plowed through the station.

    While you were apparently hibernating in Kanada, Reagan ended the cold war without firing a shot and put an end, albeit temporary, to the inflation and "malaise" started by Mr. Peanut. I credit Jimma Carter with the 27% interest rate and gas rationing as well as the start of runaway inflation. You were apparently eating a snow cone at the time.

    "Ah, the unwashed illegitimate pedestrians, how quickly they forget."

    Bollocks
    Mar 3, 2014 - 5:10pm

    Dagney

    I think one, well me anyway, can be pretty sure that when it came to monetary policy, Reagan himself had no say - he was just the mouthpiece. The bankers behind him ran the show (and still do, of course). That's where the decision to scrap the gold-standard would have come from. Certainly not from Reagan himself.

    Let's not forget a previous president that tried to effect a major change in monetary policy, who was assassinated...

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    Key Economic Events Week of 7/13

    7/13 11:30 ET Goon Williams speech
    7/13 1:00 ET Goon Kaplan speech
    7/14 8:30 ET CPI for June
    7/14 2:30 ET Goon Bullard speech
    7/15 8:30 ET Empire State and Import Price Idx
    7/15 9:15 ET Cap Ute and Ind Prod
    7/16 8:30 ET Retail Sales and Philly Fed
    7/16 11:00 ET Goon Williams again
    7/17 8:30 ET Housing Starts and Permits

    Key Economic Events Week of 7/6

    7/6 9:45 ET Markit Service PMI
    7/6 10:00 ET ISM Service PMI
    7/7 10:00 ET Job openings
    7/9 8:30 ET Initial jobless claims
    7/9 10:00 ET Wholesale inventories
    7/10 8:30 ET PPI for June

    Key Economic Events Week of 6/29

    6/30 9:00 ET Case-Shiller home prices
    6/30 9:45 ET Chicago PMI
    6/30 10:00 ET Consumer Confidence
    6/30 12:30 ET CGP and SSHW to Capitol Hill
    7/1 8:15 ET ADP Employment
    7/1 9:45 ET Markit Manu PMI
    7/1 10:00 ET ISM Manu PMI
    7/1 2:00 ET June FOMC minutes
    7/2 8:30 ET BLSBS
    7/2 10:00 ET Factory Orders

    Key Economic Events Week of 6/22

    6/22 8:30 ET Chicago Fed
    6/22 10:00 ET Existing home sales
    6/23 9:45 ET Markit flash PMIs for June
    6/23 10:00 ET New home sales
    6/25 8:30 ET Q1 GDP final guess
    6/25 8:30 ET Durable Goods
    6/26 8:30 ET Pers Inc and Spending
    6/26 8:30 ET Core inflation

    Key Economic Events Week of 6/15

    6/16 8:30 ET Retail Sales
    6/16 8:30 ET Cap Ute and Ind Prod
    6/16 10:00 ET Chief Goon Powell US Senate
    6/16 4:00 pm ET Goon Chlamydia speech
    6/17 8:30 ET Housing Starts
    6/17 12:00 ET Chief Goon Powell US House
    6/18 8:30 ET Initial Jobless Claims
    6/18 8:30 ET Philly Fed
    6/19 8:30 ET Current Account Deficit
    6/19 1:00 pm ET CGP and Mester conference

    Key Economic Events Week of 6/8

    6/9 10:00 ET Job openings
    6/9 10:00 ET Wholesale inventories
    6/10 8:30 ET CPI for May
    6/10 2:00 ET FOMC Fedlines
    6/10 2:30 ET CGP presser
    6/11 8:30 ET Initial jobless claims
    6/11 8:30 ET PPI for May
    6/12 8:30 ET Import price index
    6/12 10:00 ET Consumer sentiment

    Key Economic Events Week of 5/25

    5/26 8:30 ET Chicago Fed
    5/26 10:00 ET Consumer Confidence
    5/27 2:00 ET Fed Beige Book
    5/28 8:30 ET Q2 GDP 2nd guess
    5/28 8:30 ET Durable Goods
    5/29 8:30 ET Pers Inc and Cons Spend
    5/29 8:30 ET Core Inflation
    5/29 9:45 ET Chicago PMI

    Key Economic Events Week of 5/18

    5/18 2:00 ET Goon Bostic speech
    5/19 8:30 ET Housing starts
    5/19 10:00 ET CGP and Mnuchin US Senate
    5/20 10:00 ET Goon Bullard speech
    5/20 2:00 ET April FOMC minutes
    5/21 8:30 ET Philly Fed
    5/21 9:45 ET Markit flash PMIs for May
    5/21 10:00 ET Goon Williams speech
    5/21 1:00 ET Goon Chlamydia speech
    5/21 2:30 ET Chief Goon Powell speech

    Key Economic Events Week of 5/11

    5/11 12:00 ET Goon Bostic speech
    5/11 12:30 ET Goon Evans speech
    5/12 8:30 ET CPI
    5/12 9:00 ET Goon Kashnkari speech
    5/12 10:00 ET Goon Quarles speech
    5/12 10:00 ET Goon Harker speech
    5/12 5:00 ET Goon Mester speech
    5/13 8:30 ET PPI
    5/13 9:00 ET Chief Goon Powell speech
    5/14 8:30 ET Initial jobless claims and import prices
    5/14 1:00 ET Another Goon Kashnkari speech
    5/14 6:00 ET Goon Kaplan speech
    5/15 8:30 ET Retail Sales and Empire State index
    5/15 9:15 ET Cap Ute and Ind Prod
    5/15 10:00 ET Business Inventories

    Key Economic Events Week of 5/4

    5/4 10:00 ET Factory Orders
    5/5 8:30 ET US Trade Deficit
    5/5 9:45 ET Markit Service PMI
    5/5 10:00 ET ISM Sevrice PMI
    5/6 8:15 ET ADP jobs report
    5/7 8:30 ET Productivity
    5/8 8:30 ET BLSBS
    5/8 10:00 ET Wholesale Inventories

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